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American  :':r;K::v;^; 
Commercial  Credits 


By 

WILBERT  WARD,  A.B.,  LL.B. 

Assistant  Cashier,  The  National  City  Bank  of  New  York; 
Member  of  the  New  York  Bar;  Special  Lecturer  on  Foreign 
Trade,  New  York  Chapter,  American  Institute  of  Banking; 
Chairman  Commercial  Credit  Committee,  American  Accept- 
ance Council;  Chairman  New  York  Bankers'  Commercial 
Credit  Conference  of  1920 


With  a  Foreword  by 
PAUL  M.   WARBURG 

Member  of   Federal  Advisory  Council,  and  formerly   Vice- 
Govemor,  Federal  Reserve  Board 


NEW  YORK 

THE  RONALD  PRESS  COMPANY 
1922 


•V  •• /y  !'•  r *•,*!' •    *  ••      I 


Copyright,  1922,  by 
The  Ronald  Press  Company 


All  Rights  Reserved 


FOREWORD 

There  is  nothing  more  interesting  than  to  watch  the  first 
development  of  a  child  and  its  rapid  growth  into  full 
manhood ;  it  is  fascinating  even  to  follow  his  first  struggles 
in  overcoming  children's  diseases.  For  those  actively  con- 
nected with  the  establishment  and  development  of  the 
federal  reserve  system,  it  has  been  a  thrilling  spectacle 
to  see  it  grow  up  so  rapidly,  turning  into  a  full-size  giant 
who  today  is  surprising  the  world. 

It  is  difficult  for  us  to  realize  how  radical  the  change 
in  American  banking  psychology  has  been  since  the  enact- 
ment of  the  Federal  Reserve  Act.  When  in  19 14  the 
power  to  extend  credits  by  the  granting  of  bankers' 
acceptances  was  given  to  national  banks,  the  majority  of 
our  leading  bankers  looked  askance  upon  this  new  privi- 
lege, and  some  of  them,  indeed  not  the  smallest  amongst 
them,  stated  in  no  uncertain  terms  that  as  far  as  their 
bank  was  concerned  it  would  never  avail  itself  of  this 
power.  The  result  was  that  for  the  year  19 14,  open- 
market  purchases  by  federal  reserve  banks  was  insignifi- 
cant; by  the  end  of  191 5  it  did  not  exceed  $65,000,000; 
and  by  the  end  of  1916  it  had  reached  $385,000,000,  still 
a  comparatively  small  figure  for  a  country  of  the  vast 
resources  of  ours. 

During  all  these  years  officials  of  the  federal  reserve 
system  kept  on  preaching  the  gospel  of  bankers'  acceptance 
credits,  trying  to  persuade  banks  to  do  their  part  in  sup- 
planting foreign  acceptance  credits  by  those  issued  by  our 
own  banks.  Real  headway  in  this  regard  was  made  only  in 
T917  when  the  formation  of  large  acceptance  credit  syn- 
dicates began  to  popularize  acceptance  banking  amongst 


4HG3.'J( 


IV  FOREWORD 

American  banks.  Matters  then  took  a  turn  which  is  fairly 
characteristic  of  our  country.  Banks  suddenly  went  from 
one  extreme  to  the  other.  They  became  so  eager  to  put 
out  their  acceptances,  so  anxious  to  earn  commissions 
which  came  to  them  so  easily  without  involving  their  own 
loanable  funds,  that  many  of  them  apparently  overlooked 
the  risks  connected  with  the  granting  of  every  credit,  be 
it  a  cash  or  an  acceptance  credit;  and  with  the  boom 
period  following  the  Armistice  the  aggregate  of  bankers* 
acceptances  outstanding  in  the  United  States  soon  soared 
to  an  amount  estimated  at  one  billion  dollars,  while  the 
federal  reserve  banks'  open-market  purchases  of  1920 
totaled  $3,200,000,000. 

Then  came  the  collapse  of  inflated  prices,  and  with 
it  the  wave  of  cancellations  and  the  epidemic  of  dis- 
honoring existing  contracts  and  pledges.  It  then  became 
evident  how  poorly  prepared  and  equipped  quite  a 
number  of  accepting  banks  had  been  which  had  ex- 
tended acceptance  credits,  so-called  letters  of  credit,  con- 
firmed or  unconfirmed,  in  all  parts  of  the  world.  In 
times  of  prosperity  people  generally  lived  up  to  their 
contracts  without  seeking  for  loopholes  through  which 
they  might  escape  their  obligations.  It  is  different 
in  times  of  adversity;  and  events  soon  proved  with  om- 
inous conclusiveness  that  the  loose  system  under  which 
these  banks  had  operated  offered  all  kinds  of  holes 
through  which  a  slippery  customer  might  escape,  or  in 
any  case  find  a  sufficient  pretext  to  claim  the  right  to  evade 
his  contract.  It  is  true  that  not  only  did  these  condi- 
tions exist  in  the  United  States,  but  that  all  over  the 
world  similar  difficulties  arose.  Where  unscrupulous 
buyers  declined  to  honor  their  obligations,  taking  refuge 
behind  some  technical  plea  of  non-compliance  on  the  part 
of  the  shippers,  or  where  shippers  indulged  in  sharp  prac- 


FOREWORD  V 

tices,  the  accepting  banks  were  placed  in  the  fatal  position 
that  by  living  up  to  their  obligations,  given  in  behalf  of 
the  customers,  they  would  lose  all  recourse  against  the 
customers  in  case  the  courts  should  sustain  the  latter's 
technical  objections,  no  matter  how  frivolous  and  dis- 
reputable those  objections  would  appear  to  the  accepting 
banks.  This  in  turn  brought  about  the  unheard-of  condi- 
tion that  the  seller  who  had  shipped  the  goods  on  the 
strength  of  a  confirmed  credit  opened  by  a  reputable  bank, 
or  a  third  party  who  had  negotiated  the  credit  in  good 
faith,  found  the  accepting  banks  going  back  on  their 
sacred  obligations. 

To  those  deeply  concerned  in  the  future  of  American 
banking  it  became  obvious  that  steps  would  have  to  be 
taken  to  render  impossible  recurrences  of  this  sort.  For, 
if  permitted  to  continue,  this  lax  observance  of  contracts 
would  destroy  the  very  confidence  upon  which  letter  of 
credit  business  must  rest  and  force  us  back  upon  the  primi- 
tive and  wasteful  basis  of  cash  dealings,  unless,  indeed, 
other  countries,  particularly  England,  were  to  master  the 
difficulties  and  find  ways  and  means  to  open  letters  of 
credit  in  a  way  that  would  command  the  patronage  of  the 
traders  and  shippers  all  over  the  world,  including  our  own. 

Considerations  of  this  sort  brought  into  life  the  so- 
called  "Commercial  Credit  Conference"  which  bent  its 
eflForts  on  securing  the  adoption  of  a  uniform  terminology 
in  dealing  with  letters  of  credit  and  on  devising  credit 
instruments  which  would  be  proof  against  the  uncertain- 
ties that  had  led  to  the  disasterous  confusion  of  1919.  The 
thought  that  moved  this  "Commercial  Credit  Conference" 
was  that  bankers,  purchasers,  and  sellers  could  reach  a 
common  agreement  with  regard  to  a  uniform  method  of 
interpretation  and  a  basis  could  be  developed  upon  which 
American  bankers  could  open  letters  of  credit  in  safety 


VI  FOREWORD 

and  keep  the  reputation  of  dollar  acceptances  untarnished 
in  all  the  markets  of  the  world.  The  American  Acceptance 
Council  was  keenly  interested  in  this  work  and  joined 
forces  with  the  Commercial  Credit  Conference,  particu- 
larly in  using  its  influence  with  the  leading  American  banks 
to  bring  into  effect  a  common  plan  of  co-operation. 

American  acceptance  banking  has  now  grown  to  full 
manhood.  It  has  safely  passed  through  an  acute  stage  of 
a  vicious  children's  disease.  If  we  may  hope  with  confi- 
dence that  in  the  future  the  American  letter  of  credit 
business  will  develop  on  a  solid  foundation  without  being 
exposed  to  the  vicissitudes  of  the  past,  the  banking  and 
business  community  owes  a  debt  of  gratitude  to  the  Com- 
mercial Credit  Conference,  and  particularly  to  its  chair- 
man, Mr.  Ward. 

America's  new  reserve  banking  system  can  only  reach 
its  fullest  development  and  highest  efficiency  if  we  succeed 
in  constructing  as  its  foundation  a  discount  market  as  wide 
and  important  as  that  of  London.  This  can  only  be  accom- 
plished through  the  development  to  its  utmbst  possibilities 
of  the  art  of  making  and  marketing  American  bankers' 
.acceptances.    It  is  the  first  requisite  of  a  bankers'  accept- 
ance that  it  should  be  as  good  as  gold  and  that  there  can- 
I  not  be  any  vestige  of  a  doubt  as  to  its  validity. 
•'        Whatever  is  done  in  removing  any  obstacles  standing 
in  the  way  of  the  achievement  of  these  ends,  is  a  distinct 
service  to  the  country. 

In  recording  the  history  of  the  epidemic  of  19 19  and  in 
teaching  the  prophylactics  required  in  order  to  avoid  its 
recurrence,  Mr.  Ward's  book  will  prove  itself  a  contribu- 
tion of  a  genuinely  constructive  order. 

Paul  M.  Warburg 


PREFACE 

Knowledge  on  the  part  of  American  bankers  of  the 
intricacies  of  the  commercial  letter  of  credit  business  has 
scarcely  kept  pace  with  the  growth  of  the  use  of  the  in- 
strument. The  expansion  of  this  business  was  inevitably 
involved  in  that  of  the  bank  acceptance,  the  use  of  which, 
first  permitted  in  1914,  had,  by  1920,  reached  proportions 
exceeding  those  contemplated  by  its  advocates.  While, 
however,  the  more  common  employment  of  the  letter  of 
credit  had  made  bankers  familiar  with  its  general  aspects, 
intimate  knowledge  of  commercial  credit  business  was 
confined  to  subordinate  officials  in  charge  of  the  com- 
mercial credit  departments  of  our  credit-opening  banks. 

The  business  depression  of  1920  brought  about  a  reali- 
zation of  the  fact  that  there  would  have  to  be  a  broader 
understanding  of  the  instrument  if  its  use  were  to  be  con- 
tinued by  American  bankers  without  loss  of  their  standing 
before  the  rest  of  the  world.  It  was  appreciated  that 
bankers  would  have  to  be  more  careful  in  observing  the 
obligations  they  assumed  under  credits  opened  by  them. 
The  lack  of  uniformity  of  commercial  credit  practice  in 
some  instances,  moreover,  had  placed  our  credit-opening 
banks  in  a  position  in  which  the  substantial  fulfilment  of 
their  obligations,  despite  technical  considerations,  created 
grave  issues  with  country  banks  or  importing  houses, 
which  did  not  fully  understand  their  rights  and  liabilities 
under  the  credits  opened  on  their  behalf. 

One  of  the  witnesses  to  this  situation  was  Governor 
Strong  of  the  New  York  Federal  Reserve  Bank,  who  was 
in  the  Far  East  during  the  height  of  the  crisis  in  the 
sugar  market.     Mr.   Strong  has   said  that  immediately 


Vlll  PREFACE 

upon  his  return  to  the  United  States  he  called  upon  the 
principal  officials  of  American  banking  institutions,  and 
asked  them  whether  they  were  aware  of  the  serious  nature 
of  the  action  which  had  been  taken  by  their  institutions  in 
connection  with  commercial  credit  transactions,  and  which 
had  been  interpreted  by  Far  Eastern  bankers  as  being 
nothing  less  than  the  attempted  nullification  of  their  credit 
obligations.  He  found  that  there  was  generally  a  lack  of 
appreciation  of  the  significance  of  their  position. 

A  Commercial  Credit  Conference  of  American  bankers 
was  appointed  in  1920  to  search  for  a  remedy  for  this 
situation.  It  has  just  now,  at  the  conclusion  of  a  two-year 
study,  recommended  a  standardized  practice,  the  adoption 
of  which,  it  is  hoped,  will  prevent  a  recurrence  of  the 
troubles.  As  the  legal  and  banking  literature  of  Great 
Britain  and  the  Continent  contained  little  mention  of  the 
subject  it  was  necessary  for  the  Conference  to  study 
actual  practices,  to  examine  the  instruments  of  the  leading 
international  banks,  and  to  discuss  problems  and  theories 
with  the  men  who  were  actually  engaged  in  handling  com- 
mercial credit  transactions.  The  information  thus  gained 
had  then  to  be  subjected  to  analysis  by  students  of  the 
technique  of  foreign  banking  and  foreign  trade,  and  their 
conclusions  had  in  turn  to  be  tested  from  the  legal  aspect 
by  bank  counsel. 

The  purpose  of  this  book  is  to  make  generally  available, 
not  alone  the  Conference's  conclusions  and  recommenda- 
tions, but  an  explanation  of  commercial  credit  practice,  a 
representative  selection  of  typical  credit  instructions,  and 
a  summary  of  the  leading  precedents,  sufficient  to  enable 
bankers,  merchants,  and  lawyers  to  gain  a  true  understand- 
ing of  the  practical  procedure  connected  with  commercial 
credit  operations  and  of  the  legal  relationships  of  the  par- 
ties to  the  transactions. 


PREFACE  IX 

It  is  a  pleasure  to  acknowledge  the  debt  which  the 
author  in  common  with  all  who  desire  to  see  the  United 
States  maintain  its  position  as  a  center  of  international 
finance,  owes  to  the  scholarly  researches  of  Karl  Nicker- 
son  Llewellyn,  Chester  B.  McLaughlin,  Jr.,  and  to  Carl 
A.  Mead,  the  last  mentioned  of  whom  has  contributed  to 
this  book  the  chapters  on  the  legal  aspect  of  commercial 
letters  of  credit. 

WiLBERT  Ward 

New  York  City, 
May  I,  1922 


CONTENTS 

Chapter  Page 

Introduction 3 

I  The   Rise   of    Commercial   Letters   of 

Credit  7 

II  An  Outline  of  Our  Study   18 

III  Definition  and  Classification 29 

IV  The  Absence  of  a  Standard  Practice  . .  45 
V  The  Confusion  Concerning  Confirma- 
tion    72 

VI  The      Consequences      of      Haphazard 

Growth 87 

VII  The   Regulations   of    1920   and   Their 

Results 102 

VIII  Recognition  of  the  Need  for  Standard 

Forms   118 

IX  The  Right  to  Revoke 129 

X  The  Standard  Application  and  Agree- 
ment TO  Reimburse 140 

XI  The  Standard  Commercial  Letters  of 

Credit  154 

XII  Commercial  Credit  Accounting 177 

XIII  Recourse  Against  the  Beneficiary 190 

XIV  Protection  of  the  Mercantile  Risk  . .  206 
XV  Collateral  Uses  of  Commercial  Credits  223 

XVI  The    Letter    of    Credit    as    a    Trade 

Weapon    232 

XVII  Nature    of    Rights    and    Obligations 
Created  by  Documentary  Letters  of 

Credit  (By  Carl  A.  Mead)    247 

XVIII  Performance       Under       Documentary 

Letters  of  Credit  (By  Carl  A.  Mead)  . .     257 


FORMS  AND  ILLUSTRATIONS 

Figure  Page 

1.  Relationship  of  Opening  Bank  to  Buyer  and  Beneficiary. .      31 

2.  Relationship  of  Buyer,  Opening  Bank,  Notifying  Bank, 

and  Beneficiary •_      32 

3.  Relationship    of    Buyer,    Opening    Bank,     Negotiating 

Bank,  and   Beneficiary 33 

4.  Relationship  of  Buyer,  Opening  Bank,  Confirming  Bank, 

and  Beneficiary 35 

5.  Relationship  of  Parties  in  a  Reimbursement  Credit 42 

6.  South  American  SterHng  Credit  Opened  Through  London  47 

7.  Circular  Negotiation  Credit 50 

8.  Australian  Eastern  or  American  Sterling  Credit 55 

9.  American  Dollar  Credit  Opened  by  an  Australian  Bank. .  57 

10.  American  Dollar  Credit  Opened  by  a  Canadian  Bank...       58 

11.  Instructions  Sent  to  New  York  Bank  by  European  Bank 

Opening  a  Dollar  Credit 60 

12.  Typical  Authority  to  Purchase 61 

13.  Buyer's  Letter  of  Guaranty  Issued  in  Connection  with 

an  Authority  to  Purchase 63 

J.4.  Guaranteed  Authority  to  Purchase 65 

15.  Dollar  Import  Credit 67 

16.  Confirmed  Dollar  Export  Credit. 69 

17.  Unconfirmed  Dollar  Export  Credit... 70 

18.  Notice  Attached  to  Unconfirmed  Credit 138 

19.  Standard  Application  for  Commercial  Letter  of  Credit..  143 

20.  Authority     to     Pay — Commercial     Credit     Conference 

Form  A  160 

21.  Circular  Type  of  Irrevocable  Credit — Commercial  Credit 

Conference  Form  B 163 

22.  (a)  Specially    Advised    Straight    Irrevocable    Credit — 

Commercial  Credit  Conference  Form  C-a 166 

(b)  Specially  Advised  Negotiation  Irrevocable  Credit — 
Commercial  Credit  Conference  Form  C-b 167 

23.  (a)  Specially   Advised    Straight   Confirmed   Irrevocable 

Credit— Commercial  Credit  Conference  Form  D-a 169 

(b)  Specially    Advised    Negotiation    Confirmed    Irrevo- 
cable Credit — Commercial  Credit  Conference  Form  D-b    170 

24.  Commercial    Credit    Conference — Inter-bank    Form    A 

(Authority  to   Pay— Advice   from  Opening  Bank  to 
Paying  Bank)    180 

25.  (a)  Commercial    Credit    Conference — Inter-bank    Form 

C-a   (Specially  Advised  Straight  Irrevocable  Credit — 
Advice  from  the  Opening  Bank  to  the  Notifying  Bank)     183 

xii 


FORMS  AND  ILLUSTRATIONS  xni 

Figure  Page 

(b)  Commercial  Credit  Conference — Inter-bank  Form 
C-b  (Specially  Advised  Negotiation  Credit — Advice 
from  the  Opening  Bank  to  the  Notifying  Bank) 184 

26.  (a)  Commercial    Credit    Conference — Inter-bank    Form 

D-a  ( Specially  Advised  Straight  Confirmed  Irrevocable 
Credit — Advice  from  Opening  to  Confirming  Bank)  . .  186 
(b)  Commercial  Credit  Conference — Inter-bank  Form 
D-b  (Specially  Advised  Negotiation  Confirmed  Irrevo- 
cable Credit — Advice  from  Opening  Bank  to  Con- 
firming Bank) 187 

27.  Bank  Acceptance  195 


American 
Commercial  Credits 


INTRODUCTION 

The  interest  of  American  business  men  in  the  subject 
of  commercial  letters  of  credit  is  very  widespread,  but 
it  is  of  comparatively  recent  date.  Prior  to  the  Great  War,--. 
though  our  export  trade  showed  a  gratifying  increase  from 
decade  to  decade,  it  was  overshadowed  by  that  of  the 
world's  great  market  place — Europe.  England,  Germany, 
and  France  were  in  the  nature  of  gigantic  department 
stores,  equipped  with  highly  organized  systems  for  the 
communication  of  orders,  the  delivery  of  merchandise,  and 
the  extension  of  credit.  The  United  States  until  1914^ 
conducted  a  "cash  and  carry"  business  on  a  side  street. 

In  specialties,  such  as  steel,  typewriters,  cash-registers, 
talking  machines,  automobiles,  shoes,  hardware,  and 
cameras,  our  skill  as  overseas  traders  equaled  that  of  the 
best  exporters  in  the  world.  However,  the  great  majority 
of  our  manufactures  still  had  to  learn  how  the  success  of 
their  compatriots  had  been  achieved  when  in  19 14  the 
European  "storekeepers"  fell  out.  Presently  the  neutral 
customers  of  these  European  storekeepers  found  them  too 
busily  engaged  in  their  quarrel  to  attend  to  business.  They 
quickly  came,  then,  to  America  in  search  of  many  articles 
which  had  never  before  entered  into  our  export  trade.  And 
while  we  were  trying  our  best  to  meet  this  unexpected  de- 
mand, the  European  shopkeepers  found  themselves  con- 
suming their  own  stocks  more  rapidly  than  they  could 
replenish  them,  and  joined  the  crowd  which  surged  at  our 
door.  It  was  then  that  interest  in  commercial  letters  of 
credit  became  intense  and  general  in  this  country. 

Commercial  letters  of  credit  as  such  were  not  new 


^},  i  Vt'  ::AM:E;^lCAN/C6kMERCIAL  CREDITS 

devices  in  1914.  They  had  for  a  generation  at  least  been 
a  favorite  method  with  European  merchants,  particularly 
the  British,  in  financing  importations  of  raw  materials 
from  this  and  other  countries.  In  this  way  their  useful- 
ness had  impressed  itself  upon  American  sellers  of  goods 
even  before  the  war.  They  already  were  employed  to  a 
limited  extent  by  our  own  merchants,  who,  in  bidding  for 
the  products  of  the  Far  East  and  other  markets  where  they 
came  into  competition  with  European  importers,  were 
compelled  to  offer  the  same  mode  of  payment  as  was 
offered  by  the  Europeans. 

Commercial  letters  of  credit  were  then,  however,  prac- 
tically unknown,  to  domestic  traders,  who  had,  since  Civil 
War  days,  largely  sold  on  open  account.  Under  the  open- 
account  system  the  seller  delivers  the  merchandise  to  the 
buyer  and  extends  him  credit  on  book  account.  He  is 
without  security  and  has  no  self-proving  evidence  of  the 
debt;  moreover  under  this  method  his  capital,  or  the 
money  he  borrows,  is  tied  up  in  the  goods  until  they  are 
paid  for.  There  had  been  a  growing  feeling,  even  among 
domestic  traders  in  the  United  States,  that  the  open- 
account  system  did  not  permit  the  building  up  of  a  solid 
domestic  credit  structure,  and  when  the  war  broke  out  it 
was  obvious  that  the  system  would  not  do  at  all  for  our 
new  foreign  trade. 

The  American  merchant  was  not  ready  to  extend 
credit  to  a  foreigner  on  open  account  without  security  and 
thus  tie  up  his  capital  until  the  merchandise  had  arrived 
overseas  and  been  disposed  of.  Where  he  had  confidence 
in  the  foreign  buyer,  the  American  seller  might  be  ready  to 
draw  on  him,  with  documents  attached,  to  be  surrendered 
against  payment,  or  acceptance,  of  the  draft.  But  most 
American  merchants  in  1914  were  dealing  with  new 
customers.    Confidence  was  not  established ;  credit  inf or- 


INTRODUCTION  5 

mation  on  foreign  names  was  not  generally  available ;  and 
political  and  economic  conditions  were  changing  rapidly. 
So  the  American  merchant  felt  justified,  as  a  general 
rule,  in  expecting  payment  for  his  merchandise  before  it 
left  this  country.  And  commercial  letters  of  credit  came 
to  be  the  instruments  employed  for  this  purpose,  because 
they  were  readily  adapted  to  affording  cash  to  the  seller 
in  exchange  for  the  shipping  documents.  They  came, 
therefore,  into  general  use  in  our  export  trade  beginning 
with  1 9 14.  Their  employment  in  our  import  trade  ex- 
panded with  like  rapidity,  and  within  a  year  or  two  they 
made  their  appearance  in  domestic  trade  as  well. 

If  commercial  letters  of  credit,  in  the  few  years  which 
have  elapsed  since  their  general  introduction  into  our 
domestic  and  foreign  trade,  had  come  to  be  completely 
understood,  their  legal  nature  thoroughly  defined,  and 
their  possibilities  wholly  appreciated,  interest  in  them  as  an 
object  of  study  would  be  limited  to  a  few  specialists,  and 
they  would  scarcely  need  an  historian.  None  of  these 
things,  however,  has  occurred.  As  was  naturally  to  be  ex- 
pected, due  to  the  abnormal  and  chaotic  conditions  that  led 
to  their  more  general  adoption  in  this  country,  commercial 
letters  of  credit  have  been  largely  used  without  being 
thoroughly  understood.  Thus  the  curious  situations  which 
have  arisen  as  a  consequence  have  intensified  the  interest 
in  them  as  instruments  of  finance. 

American  bankers  have  for  the  past  two  years  given 
the  subject  intensive  study,  so  that  the  commercial  letter 
of  credit  instruments  issued  in  the  future  may  clearly  in- 
dicate the  obligations  intended,  and  that  commercial  credit 
practices  may  become  more  uniform.  Lawyers  are  seeking 
to  familiarize  themselves  with  the  subject,  both  to  assist 
their  clients  out  of  difficulties  into  which  they  have  fallen 
because  of   the   present   lack   of   understanding,   and   to 


6  AMERICAN  COMMERCIAL  CREDITS 

counsel  them  how  to  avoid  these  pitfalls  in  the  future. 
And  merchants  are  coming  to  appreciate  that  commercial 
letters  of  credit,  properly  understood  and  intelligently 
utilized,  will  serve  them  better  as  a  trade  weapon  than  any 
legislative-born  panacea. 

From  bankers,  lawyers,  and  merchants  alike,  has  come 
the  suggestion  that  some  effort  be  made  to  picture  the 
commercial  letter  of  credit  business  as  it  has  grown  in  this 
country;  to  make  a  permanent  record  of  problems  which 
have  developed  with  its  use  and  of  the  solutions  which 
have  been  made  of  these  problems ;  and,  above  all,  to  seek 
out  and  discover,  beneath  the  surface  confusion,  the  basic 
principles  which  underlie  commercial  letter  of  credit 
operations.  It  is  felt  that  if  this  is  done  both  banking 
practice  and  legal  decisions  will  in  the  future  clarify  and 
not  obscure  the  fundamental  simplicity  which  should  give 
commercial  letters  of  credit,  rightly  understood  and  intel- 
ligently employed,  a  usefulness  far  exceeding  that  which 
they  have  as  yet  had. 

It  is  the  privilege  of  one  whose  fortune  it  was  to  be  in 
touch  with  the  various  aspects  of  the  subject  as  it  has 
developed  in  this  country,  to  undertake  this  task. 


CHAPTER  I 

THE    RISE    OF    COMMERCIAL    LETTERS    OF 
CREDIT 

Our  Inheritance 

The  present  and  the  future  development  of  commer- 
cial letters  of  credit  appears  to  rest  in  American  hands; 
but  for  the  story  of  their  origin  and  past  development 
we  must  look  abroad.  There  is  reason  to  believe  that 
we  shall,  in  the  first  decade  of  our  widespread  interest 
in  the  subject,  contribute  more  to  the  development  of 
commercial  letters  of  credit  than  we  have  inherited  from 
their  centuries  of  slow  growth  elsewhere.  To  come,  how- 
ever, to  a  proper  appreciation  of  the  progress  made  since 
1 9 14,  we  must  first  turn  backward,  and  survey  the  herit- 
age which  came  under  our  ministration  at  that  event- 
ful time.  But  even  before  that  we  must  define  commercial 
letters  of  credit  and  indicate  their  place  among  instruments 
of  finance. 

Bill  of  Exhange 

To  indicate  the  extent  to  which  a  bank  will  give  a  cus- 
tomer money  down,  in  exchange  for  his  promise  to  repay 
it  at  a  later  date,  there  is  fixed  what  is  termed  a  "line  of 
credit."  The  granting  of  a  line  of  credit  by  a  bank  to  a 
customer  is  tantamount  to  saying  that  the  granting  bank 
has  evaluated  the  credit  risk  of  its  customer,  and  signifies 
its  willingness  to  extend  him  the  amount  stipulated.  This 
credit  may  be  given  either  by  handing  the  customer  cash, 
or  by  putting  the  amount  to  the  credit  of  his  account, 

7 


'j8 :  ^.;t  vi ; AJil|:kiGA^  6qmmercial  credits 

subject  to  his  checks.  The  customer  is  thus  supplied 
with  funds  with  which  to  purchase  and  pay  at  once  for 
goods  which  he  expects  to  resell  at  a  higher  price  before 
the  loan  matures. 

Such  an  arrangement  may  give  the  customer  more 
than  he  needs.  The  merchant  from  whom  he  is  buying 
may  be  content  to  make  a  present  delivery  of  the  goods 
in  exchange  for  a  satisfactory  promise  to  pay  at  a  later 
date.  It  was  in  response  to  the  need  for  an  instrument 
to  serve  as  evidence  of  such  a  promise  that  the  bill  of  ex- 
change payable  at  a  future  date  arose.  It  has  been  conjec- 
tured that  the  bill  of  exchange  in  its  original  form  was 
a  letter  from  a  merchant  in  one  country  to  his  debtor, 
a  merchant  in  another,  requiring  him  to  pay  the  debt 
to  a  third  person  who  carried  the  letter  and  happened 
to  be  traveling  to  the  place  where  the  debtor  resided. 

The  bill  of  exchange  is  made  payable  at  a  future  date 
in  order  to  give  the  merchant  who  receives  the  goods  time 
to  dispose  of  them  and  utilize  the  proceeds  of  his  sale  for 
the  liquidation  of  the  debt  arising  from  his  purchase. 
By  accepting  the  bill  on  first  presentation,  the  merchant 
receiving  the  goods  acknowledges  his  obligation  to  pay 
cash  at  its  maturity. 

In  the  meantime  the  merchant  who  has  sold  the  goods 
can,  if  he  needs  funds,  offer  the  accepted  bill  to  a  note- 
broker  for  discount.  The  readiness  with  which  such  an 
acceptance  is  discounted  depends  largely  upon  the  repu- 
tation and  credit  standing  of  the  acceptor.  If  the  buy- 
ing merchant  is  unknown  to  the  note-broker,  his  accept- 
ance is  not  attractive  and  consequently  is  less  useful  to 
the  selling  merchant.  As  an  alternative  to  paying  cash 
for  the  goods,  the  buying  merchant  may  find  it  cheaper, 
in  case  the  selling  merchant  rejects  his  own  acceptance  as 
unsalable,  to  finance  his  purchase  by  paying  a  commission 


RISE  OF  LETTERS  OF  CREDIT  9 

to  a  better  known  merchant  or   banker   to   accept   for 
him. 

Commercial  Letter  of  Credit  Defined 

It  thus  transpires  that  a  bank  can  afford  a  customer 
a  valuable  facility,  not  alone  by  furnishing  him  cash,  but 
by  exchanging  its  own  credit  for  that  of  the  customer. 
That  is,  it  can  accept  time  bills  of  exchange  drawn  on  it- 
self, for  account  of  the  customer.  And  if  it  is  prepared 
to  do  so,  there  is  no  good  reason  why  it  should  not  be 
ready  to  evidence  this  agreement  in  writing. 

A  buyer  who  can  place  in  the  hands  of  a  seller  a  writ- 
ten instrument  issued  by  the  buyer's  bank,  authorizing  the 
seller  to  draw  in  accordance  with  certain  terms,  and  stipu- 
lating in  legal  form  that  all  such  bills  will  be  honored,  has 
at  his  command  an  instrument  which  will  make  his  busi- 
ness more  attractive  to  the  seller  than  would  otherwise  be 
the  case.  An  instrument  by  which  a  bank  gives  formal 
evidence  of  its  willingness  to  undertake  this  class  of  opera- 
tion for  one  of  its  customers  is  what  has  come  to  be  known 
as  a  "commercial  letter  of  credit."  A  commercial  letter 
of  credit  is  normally,  though  not  necessarily,  issued  in 
favor  of  a  third  party,  usually  a  seller  of  goods,  desig- 
nated by  the  customer  on  whose  behalf  the  credit  is  issued. 

As  we  shall  see,  commercial  letters  of  credit  are  issued 
in  a  great  variety  of  forms  and  are  made  available  in  a 
great  many  ways.  The  essential  object  in  every  case  is 
the  same — to  evidence  to  a  selected  correspondent,  or  to 
bankers  generally,  the  nature  of  the  credit  which  the  open- 
ing bank  has  committed  itself  to  extend  to  its  customer. 

Antiquity  of  Commercial  Letters  of  Credit 

With  their  general  nature  understood,  we  can  turn  to 
the  past  history  of  commercial  letters  of  credit.     They 


y 


lO  AMERICAN  COMMERCIAL  CREDITS 

appear  almost  at  the  threshold  of  the  history  of  banking. 
Their  origin  runs  back  to  the  early  Roman  and  Lombard 
money-changers,  to  whom  are  also  attributed  the  creation 
of  bills  of  exchange.  It  would  be  reasonable,  therefore, 
to  suppose  that  these  two  instruments  of  finance,  the  let- 
ter of  credit  and  the  bill  of  exchange,  had  a  parallel  devel- 
opment. Bills  of  exchange  and  policies  of  marine  in- 
surance, which  were  both  products  of  the  same  period, 
came  under  the  observation  of  Lord  Mansfield,  who  pre- 
sided in  the  English  Court  of  King's  Bench  from  1746 
to  1758.  This  remarkable  jurist,  drawing  on  the  wis- 
dom of  all  the  continental  ordinances  and  codes  existing 
in  his  day,  and  the  practices  and  customs  of  the  trade 
which  he  learned  from  special  merchantile  jurors,  cre- 
ated the  commercial  law  of  modern  England.  There  is 
no  record,  however,  of  any  case  involving  a  letter  of  credit 
having  had  his  skilful  interpretation.  In  fact,  it  is  a  mat- 
ter of  surprise  that  there  has  been  until  recently  so  little 
litigation  about  instruments  which  have  been  known  and 
used  for  centuries.  It  is  a  tribute  to  the  keen  desire  of 
bankers  to  honor  their  obligations  without  quibble,  though 
it  has  contributed  to  the  lack  of  understanding  of  the 
subject,  that  the  use  of  commercial  letters  of  credit  has 
extended  into  these  modern  times  without  creating  enough 
litigation,  either  in  England  or  in  this  country,  to  define 
their  legal  implications. 

Arrested  Development 

While  commercial  letters  of  credit  are  not  a  novelty 
either  to  continental  banking  or  continental  commercial 
law,  their  most  extensive  employment  has  been  in  Eng- 
land. Even  there  their  general  use  appears  to  be  confined 
largely  to  the  present  generation.  For  reasons  which  are 
somewhat  obscure,  commercial  letters  of  credit,  despite 


RISE  OF  LETTERS  OF  CREDIT  ii 

their  ancient  origin,  seem  to  have  undergone  several  cen- 
turies of  arrested  development,  while  their  contemporary 
instrument,  the  bill  of  exchange,  has  run  a  course  which 
has  resulted  in  the  highly  standardized  and  negotiable  bills 
of  the  present  day. 

It  is  likely  that  one  cause  of  this  arrested  development 
was  that  up  to  the  present  period,  in  which  international 
banking  has  undergone  great  expansion,  the  acceptance 
of  bills  by  proxy  devolved  upon  the  better  known  mer- 
chants, who  in  time  found  the  commission  for  "lending 
their  credit"  to  importers  less  well  established,  a  source  of 
revenue  profitable  enough  to  displace  their  original  mer- 
chandise dealings.  These  houses  were  so  few,  their  pres- 
tige was  so  great,  and  their  ramifications  so  extensive, 
that  their  willingness  to  accept  was  established  by  a  course 
of  dealings,  or  by  informal  correspondence,  rather  than 
by  the  creation  and  issuance  of  formal  commercial  credit 
instruments*  The  idea  of  a  written  undertaking  that 
bills  to  be  drawn  later  would  be  honored  was  understood, 
and  was  not  permitted  to  lapse.  But  it  was  not  until 
comparatively  modern  times  that  the  entrance  of  banks 
into  the  business  of  accepting  bills,  and  the  widened  circle 
of  merchants  carrying  on  the  increased  volume  of  trade 
incident  to  present  times,  operated  to  cast  the  device  into 
any  fixed  moulds. 

Our  Trade  Financed  by  Foreign  Agencies 

Our  own  banking  facilities  were,  until  recently,  oc- 
cupied with  the  problems  incident  to  internal  development. 
This  absorbed  our  wealth  so  completely  that  there  was  no 
surplus  of  liquid  capital  for  employment  abroad.  In  the 
meantime  our  foreign  trade  was  rapidly  growing  from 
decade  to  decade.  Its  possibilities  were  not  lost  on  foreign 
private  banking  houses  and  foreign  colonial  banks;  they 


^ 


la  AMERICAN  COMMERCIAL  CREDITS 

quietly  settled  here  and  monopolized  the  field.  The  New 
York  agency  of  the  Canadian  Bank  of  Commerce,  for  in- 
stance, was  established  in  1872 ;  it  was  followed  by  that  of 
the  Merchants  Bank  of  Canada  in  1874.  Both  have  since 
continuously  engaged  in  the  business  of  establishing  im- 
port, and  honoring  export,  letters  of  credit.  These  foreign 
banks  possessed  the  experience,  tradition,  and  organization 
that  American  banks  naturally  lacked,  and  they  served 
our  needs  adequately  and  well.  Their  aid  was  absolutely 
essential.  It  takes  not  months  but  years  and  generations 
to  train  a  nation  to  be  the  world's  banker.  It  would  have 
been  an  insurmountable  task  to  have  manned  the  foreign 
departments  of  American  banks  with  efficient  American 
staffs  during  this  period. 

Our  Entry  into  Foreign  Banking 

It  was  inevitable,  however,  that  at  some  stage  in  the 
formative  period  our  pride  would  assert  itself  and  that  we 
should  make  a  beginning  toward  building  up  purely 
American  institutions  to  finance  our  share  of  the  world's 
international  trade. 

In  1893  the  Bank  of  New  York,  National  Banking 
Association,  following  the  decease  of  the  local  agent  for 
some  British  banking  institutions,  took  over  the  represen- 
tation of  these  banks  and  thus  became  one  of  the  first, 
if  not  the  first,  American  national  bank  to  engage  in  the 
issuance  of  commercial  letters  of  credit.  These  credits 
were  issued  solely  in  connection  with  the  importation  of 
goods  to  this  country  and  were  invariably  made  available 
by  drafts  drawn  in  foreign  currencies  on  foreign  banking 
institutions. 

Other  American  banks  soon  followed  in  this  foreign 
trade  financing.  The  London  office  of  the  Equitable  Trust 
Company  of  New  York  was  opened  in  1895.    The  foreign 


RISE  OF  LETTERS  OF  CREDIT  13 

department  of  the  National  City  Bank  of  New  York  was 
established  in  1897,  and  the  charter  of  the  International 
Banking  Corporation,  which  has  since  come  under  the 
ownership  of  the  National  City  Bank  of  New  York,  was 
granted  in  1901  by  the  state  of  Connecticut.  In  1897  the 
Guaranty  Trust  Corporation  of  New  York  opened  a 
foreign  department  and  contemporaneously  established  a 
London  office.  The  Bankers  Trust  Company  has  issued 
import  credits  since  its  establishment  in  1903;  the  Chase 
National  Bank  began  the  issuance  of  import  commercial 
credits  in  foreign  currencies  as  early  as  1905.  In  191 3 
the  Irving  National  Bank  began  the  issuance  of  com- 
mercial letters  of  credit. 

In  New  York  the  use  of  foreign  currency  credits, 
available  by  drafts  on  foreign  banking  institutions,  to 
finance  our  importations,  continued  until  191 5 ;  and  it  was 
at  this  time  that  the  use  of  dollar  credits  to  finance  our 
exportations  began  on  an  extensive  scale.  In  Boston 
previous  to  19 13  national  banks  neither  had  a  foreign 
department  worthy  of  the  name,  nor  were  able  to  establish 
credits  through  their  own  foreign  correspondents  or  nego- 
tiate export  drafts  direct.  Such  business  as  came  into 
their  hands  was  immediately  turned  over  to  old-established 
private  banking  houses  with  foreign  connections. 

The  London  Discount  Market 

It  would  carry  us  too  far  afield  to  trace  all  the  causes 
which  made  London,  in  the  period  we  are  now  considering, 
the  world's  financial  center  and  the  leading  discount 
market.  Suffice  it  to  say  that  most  of  the  time  bills  of 
exchange  drawn  in  various  countries  against  sales  of 
goods  in  international  trade  found  their  way,  with  shipping 
documents  attached,  to  London.  They  were  drawn  upon 
merchants,  private  banking  houses,  and  bankers,  and  were 


14  AMERICAN  COMMERCIAL  CREDITS 

accepted  by  these  establishments  on  behalf  of  their  cus- 
tomers, who  were  the  purchasers  and  the  consignees  of  the 
merchandise  and  to  whom  the  shipping  documents  were 
then  usually  surrendered.  The  accepted  draft  was  sold  by 
the  holder  on  the  strength  of  the  high  credit  standing  of 
the  acceptor  and  upon  any  indorsements  which  the  bills  had 
accumulated.  The  purchaser  was  one  of  the  private  dis- 
count houses  or  bill-brokers,  who  in  due  course  re- 
discounted  the  bill  with  a  joint-stock  or  private  bank,  or 
with  the  Bank  of  England. 

Commercial  paper  and  bank  acceptances  formed  the 
main  assets,  not  only  of  London  banks  but  also  of  banks  in 
Paris  and  Berlin,  where  similar  though  smaller  discount 
markets  existed.  These  bills  had  the  widest  possible  market 
and  were  exchanged  daily  in  large  volume  at  margins  of 
Via  to  Vs  per  cent  in  the  interest  rate.  International 
money  flowed  to  England  for  investment  in  this  class  of 
liquid  paper  at  around  2  per  cent.  The  persistent  demand 
for  London  drafts  resulted  from  the  fact  that  they  were 
the  most  readily  salable  in  the  various  foreign  markets. 
Our  own  importers  and  banks  had  to  issue  credits  which 
provided  the  seller  with  a  bill  on  London  in  order  to  make 
the  bill  salable.  Whether  they  purchased  in  South  America 
or  in  Asia,  American  merchants  had  to  provide  European 
bank  acceptances  and  so  paid  an  annual  tribute  of  millions 
in  acceptance  commissions  to  European  bankers  for  the 
financing  of  our  trade.  The  acceptance  of  the  American 
banker,  no  matter  how  good  his  credit,  was  valueless  to 
foreign  buyers. 

The  New  York  Discount  Market 

It  was  the  lack  of  a  discount  market  like  that  of  Lon- 
don, Paris,  or  Berlin,  which  more  than  anything  else  made 
the  acceptance  of  a  New  York  bank  useless  as  an  instru- 


RISE  OF  LETTERS  OF  CREDIT  1$ 

ment  of  finance.  This  lack  was  in  turn  attributable  in 
large  measure  to  the  character  of  American  commercial 
paper.  Causes  which  it  is  aside  from  our  purpose  to  con- 
sider made  the  promissory  note,  instead  of  the  trade  and 
bank  acceptance,  the  prevailing  type  of  American  paper. 
It  was  possible  in  a  sense  for  a  bank  to  mobilize  the  promis- 
sory notes  it  had  discounted  by  offering  them  for  redis- 
count to  other  banks,  but  there  was  a  feeling  that  this 
action  might  be  unfavorably  construed.  American  com- 
mercial paper  therefore  remained  unsalable  and  unliquid 
in  character,  because,  being  without  the  indorsement  or 
acceptance  of  American  banks  of  known  repute,  it  was 
individual,  provincial,  and  local  in  its  investment  appeal. 
It  was  usually  distributed  to  the  banks  by  note  brokerage 
or  commercial  paper  houses  who  purchased  it  from  the 
makers.  Once  in  the  hands  of  the  bankers,  it  remained 
there  until  maturity,  even  under  pressure  of  such  a  de- 
mand for  money  as  would  result  in  the  calling  of  stock 
exchange  loans  and  the  throwing  of  securities  upon  the 
market.  Our  national  banks  were  not  at  that  time  per- 
mitted by  law  to  accept  time  drafts.  There  was  no 
obstacle  to  the  acceptance  of  bills  by  private  bankers,  but 
the  lack  of  anything  approaching  a  discount  market  for 
these  bills  in  New  York  was  as  effective  as  legal  prohibition 
in  keeping  private  bankers'  acceptances  from  being  created. 

Passage  of  the  Federal  Reserve  Act 

The  passage  in  1913  of  the  Federal  Reserve  Act  laid 
the  basis  upon  which  it  was  possible  to  develop  in  New 
York  the  sort  of  discount  market  that  is  indispensable  to 
the  creation  of  a  center  of  international  finance.  The 
federal  reserve  banking  system  brought  the  gold  reserves 
of  the  nation,  which  had  previously  been  carried  by  the 
individual  banks,  into  the  federal  reserve  banks,  and  the 


l6  AMERICAN  COMMERCIAL  CREDITS 

reserves  of  the  member  banks  were  carried  primarily  as 
credits  on  the  books  of  the  federal  reserve  banks.  The 
secondary  reserve  of  the  member  banks  consisted  of  paper 
eligible  for  rediscount  with  the  federal  reserve  banks. 
These  latter  institutions  thus  formed  a  great  centralized 
reservoir  of  available  mercantile  credits,  behind  which 
stood  the  government  and  the  national  reserves. 

In  order  to  mobilize  our  mercantile  credits,  however, 
it  was  necessary  to  change  the  business  habits  of  the  nation 
by  converting  these  credits  from  book  accounts  and  promis- 
sory notes  into  trade  acceptances.  The  ability  of  the 
national  banks  to  finance  foreign  trade  was  assisted  by 
authorizing  them  to  accept  bills  having  not  over  6  months 
to  run  and  growing  out  of  the  importation  or  exportation 
of  goods.  Such  paper,  having  a  maturity  at  the  time  of 
discount  of  not  more  than  90  days,  was  eligible  for  redis- 
count by  the  federal  reserve  banks,  which,  moreover,  were 
authorized  to  purchase  eligible  acceptances  in  the  open 
market  with  or  without  a  member  bank's  indorsement. 

The  Inception  of  Dollar  Letters  of  Credit 

At  the  time  the  act  became  effective,  it  seemed  unlikely 
that  any  very  radical  change  would  take  place  in  the  habit 
of  our  importers  and  bankers  in  resorting  mostly  to  credits 
raised  in  London.  It  was  believed  comparative  money 
market  conditions  and  the  universal  popularity  of  sterling 
as  a  medium  of  exchange  would  continue  to  exert  a  com- 
pelling influence  in  favor  of  London.  The  continued  exclu- 
sion of  the  domestic  acceptance,  together  with  the 
restrictions  imposed  upon  the  acceptance  of  international 
bills  by  regulations  of  the  Federal  Reserve  Board,  made  it 
also  appear  likely  that  a  general  acceptance  and  discount 
market  of  the  foreign  type,  including  buyers  and  sellers 
who  represented  a  wide  variety  of  banking  and  financial  in- 


^  RISE  OF  LETTERS  OF  CREDIT  i? 

terests,  would  not  be  possible.  All  these  calculations,  how- 
ever, were  based  upon  an  outlook  for  no  more  than  normal 
progress  in  our  export  and  import  trade  and  naturally 
could  take  no  account  of  the  tremendous  change  which  was 
to  be  brought  about  by  the  Great  War. 

The  outbreak  of  the  war  terminated  communication 
with  the  source  from  which  a  great  many  of  the  world's 
buying  markets  procured  their  merchandise  and  from 
which  they  also  obtained  facilities  for  financing.  As  the 
pressure  of  the  war  commenced  to  be  felt  the  nations  with 
whom  communication  remained  uninterrupted  found  them- 
selves more  and  more  compelled  to  subordinate  the  re- 
quirements of  their  foreign  customers  to  imperative 
domestic  needs.  These  customers  had  therefore  to  seek 
a  new  source  of  supply  and  presently  the  United  States 
became  the  world's  greatest  market  place.  The  war 
brought  overnight  to  the  United  States  new  and  strange 
buyers,  and  introduced  to  the  generality  of  our  mercantile 
community  novel  exchange  and  shipping  problems.  This 
demand  for  our  goods  came  at  a  time  when  the  delicate 
machinery  of  international  credit  had  been  dislocated  by 
the  political  and  economic  consequences  of  the  war.  The 
result  was  that  many  of  our  merchants  demanded  from 
buyers  in  every  foreign  trade  center  a  device  which  would 
assure  them  immediate  payment  in  dollars  in  exchange  for 
shipping  documents,  as  soon  as  the  documents  could  be 
obtained. 

Commercial  letters  of  credit  appeared  to  be  suited  to 
this  purpose.  And  so,  though  they  lacked  uniformity  of 
practice,  though  their  legal  effect  was  undetermined,  and 
though  our  bankers  and  merchants  were  unversed  in  their 
use,  an  enormous  volume  of  business  came  gradually  to  be 
done  by  means  of  these  instruments.  It  is  at  this  point  that 
the  story  of  American  commercial  credits  properly  begins. 


CHAPTER  II 

AN  OUTLINE  OF  OUR  STUDY 

Some  Guide-Posts 

It  may  as  well  be  confessed  at  the  outset  that  there  is 
no  well-worn  path  to  tread  in  pursuing  our  subject.  There 
is  not  even  a  blazed  trail.  Before  us  is  virgin  timber, 
which  has  grown  with  startling  rapidity  to  unprecedented 
dimensions.  Before  we  can  enter  it  boldly,  with  confi- 
dence that  we  shall  master  its  secrets  and  emerge  safe  and 
sound  at  our  journey's  end,  we  must  arrange  our  plan  of 
march.  We  shall,  therefore,  set  up  some  guide-posts,  not 
simply  to  be  able  to  debouch,  but  also  to  enable  us  at  any 
time  to  judge  how  far  we  have  progressed,  and  the  relation 
which  the  country  we  have  traversed  bears  to  the  whole 
territory. 

Haphazard  Development 

As  we  glance  toward  the  terrain  over  which  we  must 
make  our  way,  our  first  impression  will  be  that  of  an 
inextricable  confusion  of  false  paths  which  lead  nowhere. 
Some  will  be  broad  and  smooth  and  well-placarded  with 
signs  by  which  a  stranger  may  hope  to  keep  his  bearings ; 
others  will  be  narrow  and  devious  and  the  guide-boards 
will  remind  one  of  those  which  Bob  Burdette's  Rollo 
encountered  when  learning  to  travel.  When  Rollo  sought 
to  learn  why  the  finger-boards  were  painted  so  dimly,  that 
wise  man,  his  father,  replied,  "It  is  one  of  the  traditions 
of  the  office  to  make  them  in  this  way." 

"And  do  I  turn  down  this  road  to  the  left,  the  way  the 
i8 


AN  OUTLINE  OF  OUR  STUDY  19 

finger-board   points,  to   go   to   Kickapoo   Town?"   asked 
Rollo. 

"No,"  replied  his  father,  "you  go  in  exactly  the  op- 
posite direction.  That  is  another  tradition  of  the  office. 
You  see,  my  son,  the  guide-boards  are  set  up  after  this 
manner.  The  finger-board  is  nailed  to  the  post  in  the  shop, 
which  is  the  barn  of  the  supervisor.  They  are  then  loaded 
into  a  wagon  and  sent  out  on  the  road  in  charge  of  a  man 
who  cannot  read.  He  is  instructed  to  set  a  post  at  every 
road  crossing,  which  he  does,  setting  the  post  firmly  and 
making  a  good  job  of  it,  without  any  reference  to  the 
direction  in  which  the  boards  point." 

So  with  commercial  letters  of  credit.  When  we  come 
to  examine  in  detail  the  instruments  which  were  employed 
to  handle  the  enormous  volume  of  our  foreign  business 
which  came  on  the  heels  of  the  war,  we  shall  see  instru- 
ments, well  adapted  for  one  purpose,  employed  for  others 
to  which  they  were  ill  suited.  We  shall  find  that  instru- 
ments which  were  in  a  general  way  adaptable  lacked  not 
simply  uniformity  in  form  and  content,  but  certainty  in 
their  practical  construction  and  legal  scope  and  meaning.  ' 
It  was  inevitable  that  in  thus  introducing  an  unfamiliar 
device  wholesale  into  modern  foreign  trade  financing,  its 
defects  as  well  as  its  virtues  should  manifest  themselves. 
These  defects  were  not  inherent  and  inseparable,  but  re- 
sulted rather  from  some  peculiarities  of  its  development 
which  prevented  an  orderly  and  systematic  growth.  These 
circumstances  will  here  be  briefly  outlined.  Subsequently 
they  will  be  examined  in  detail. 

The  Conflict  of  Laws 

It  was  essential  to  the  development  of  standard  forms 
of  letters  of  credit  that  the  variety  of  practical  questions 
which  hinge  upon  the  legal  theory  to  be  applied  to  their 


20  AMERICAN  COMMERCIAL  CREDITS 

construction  and  interpretation  should  have  a  uniform 
solution.  Yet  the  letter  of  credit  developed  in  continental 
commercial  law  by  giving  eflPect  to  the  mercantile  idea  that 
a  promise  made  in  the  course  of  business  was  enforcible, 
while  the  English  common  law,  on  the  other  hand,  reached 
the  decision  that  a  merchant's  promise  in  writing  made  in 
a  business  transaction  did  not  of  itself  suffice  to  create  a 
legal  obligation.  As  the  use  of  commercial  letters  of 
credit  was  until  recently  confined  almost  wholly  to  over- 
seas finance,  it  followed  of  necessity  that  they  were  usually 
issued  in  one  country  for  use  in  another.  The  application 
of  these  conflicting  laws  of  separate  jurisdictions  to  iden- 
tical instruments  naturally  threw  the  legal  aspect  of  the 
subject  into  confusion.  The  minor  part  the  commercial 
credit  device  played  until  recently  in  the  world's  commerce 
developed  merely  enough  litigation  to  enable  the  English 
courts,  as  well  as  the  continental,  on  one  theory  or  another, 
to  give  them  eflfectiveness,  without  working  out  a  con- 
sistent legal  theory  which  is  the  prelude  to  uniformity. 

No  International  Standards  of  Commercial  Practice 

The  commercial  customs  which  are  involved  in  inter- 
national trade  are,  like  the  law,  often  in  conflict.  The 
buyer  who  stands  at  one  end  of  a  commercial  credit  and 
the  seller  who  is  at  the  other  are  bound  to  be  influenced 
in  their  thoughts  and  expressions  by  the  habits  of  the  com- 
munities in  which  they  live.  For  example,  the  same  word 
may  have  quite  a  different  meaning  for  each  man.  A  ton 
is  a  ton — yet  it  is  2,240  pounds  to  an  Englishman,  2,204 
pounds  to  a  Frenchman,  and  2,000  pounds  to  an  American. 
The  same  problem  may  have  a  different  solution  in  differ- 
ent countries.  It  is  the  continental  practice  to  regard  an 
obligation  which  falls  due  on  a  Sunday  or  a  holiday  as 
maturing  on  the  preceding  business  day;  in  America  we 


AN  OUTLINE  OF  OUR  STUDY  21 

prefer  it  to  mature  on  the  following  business  day.  This 
lack  of  common  standards  militated  against  the  unification 
of  commercial  letters  of  credit  through  mercantile  usage. 
To  deal  confidently  and  safely  with  an  instrument  in  which 
such  questions  come  up  constantly  for  decision,  there  must 
be  some  reconcilement  of  the  variant  viewpoints.  Yet  in 
the  vast  volume  of  commercial  credit  business  that  came 
with  the  war  demand  for  our  goods,  there  was  no  definition 
of  these  trouble-breeding  matters  of  commercial  practice. 

Confusion  in  Terminology 

The  international  character  of  commercial  letters  of 
credit  has  brought  about,  in  addition  to  the  conflict  of  legal 
theory  and  the  clash  of  commercial  usages,  a  puzzling 
confusion  of  terminology  about  identical  matters.  And 
so  as  we  journey  on  we  shall,  like  Rollo,  find  strange 
names  employed  for  familiar  objects.  Rollo  thought,  at 
one  stage  in  his  travels,  that  he  was  approaching  a  railroad 
crossing. 

"It  is  not  a  railroad,"  replied  his  father,  "it  is  a  rail- 
way. What  you  call  the  tracks  are  not  the  tracks,  but  the 
line.  And  the  rails  are  not  the  rails,  but  the  metals.  The 
yard  engine  is  a  shifting  engine;  the  switch  is  a  siding; 
we  do  not  switch  cars,  we  shunt  them;  the  conductor  is 
not  the  conductor,  but  the  guard;  the  engineer  is  the 
driver ;  the  fireman  is  the  stoker ;  the  ties  are  sleepers ;  the 
passenger  car  is  a  coach,  the  baggage  car  is  the  luggage 
van,  and  the  baggage  checks  are  the  brawsses." 

"But  why  are  all  these  things  other  than  what  they 
are?"  asked  Rollo. 

"Because  it  is  English,"  replied  his  father. 

No  better  reason  can  probably  be  given  for  the  con- 
fusion in  the  terminology  applied  by  the  two  main  branches 
of  the  English-speaking  race  to  certain  types  of  credits. 


23  AMERICAN  COMMERCIAL  CREDITS 

The  British  define  a  "bankers'  credit"  as  "an  intimation 
by  one  bank  to  another  that  a  merchant  has  opened  a 
credit  with  them  for  bills  to  be  drawn  under  the  terms 
stated,  without  an  undertaking  by  the  bank  in  advance  that 
it  will  give  its  acceptance  to  bills  so  drawn."  A  "con- 
firmed bankers'  credit,"  in  the  British  view  is  one  consti- 
tuting an  undertaking  to  accept.  To  the  American  banker 
these  terms  and  definitions  are  alien.  He  calls  a  credit 
of  the  first  type  a  "revocable"  credit  and  of  the  second 
type  an  "irrevocable"  credit,  and  limits  the  use  of  the  term 
"confirm"  to  the  act  on  the  part  of  one  bank  of  under- 
writing or  guaranteeing  the  "irrevocable"  credit  of  another 
bank. 

The  Consequences  of  Haphazard  Development 

The  trouble-breeding  consequences  of  this  haphazard 
development  of  our  commercial  credit  business  did  not 
immediately  appear.  So  long  as  the  war  and  postwar  de- 
mand continued  to  exert  an  upward  pressure  on  com- 
modity prices,  there  was  a  general  tendency  to  regard 
questions  as  to  the  interpretation  of  commercial  credit 
instruments,  which  arose  constantly,  as  incidents  insepar- 
able from  commercial  credit  operations. 

The  sellers  in  whose  favor  credits  were  issued  were 
usually  successful  in  evading  an  issue  on  these  matters  by 
arguing  that  it  was  the  duty  of  the  banks  to  assist  and  not 
to  impede  the  execution  of  the  transactions  they  were  en- 
gaged in  financing.  There  consequently  grew  up  a  policy 
*^of  liberal  interpretation  of  instructions  in  the  interest  of 
the  prompt  movement  of  goods,  which  was  effectual  so 
long  as  the  business  situation  continued  favorable.  But 
with  the  cessation  of  the  demand  for  goods,  buyers  became 
critical  of  these  interpretations,  however  well  they  were 
intended,  if  a  stricter  construction  would  save  them  from 


AN  OUTLINE  OF  OUR  STUDY  23 

the  necessity  of  accepting  a  purchase  which  the  turn  of 
affairs  had  made  unprofitable.  There  ensued  a  period  in 
which  cancellation  of  contracts  and  rejection  of  merchan- 
dise on  technical  grounds  were  resorted  to  by  merchants 
everywhere.  Bankers  who  had  issued  commercial  letters 
of  credit  were  instructed  by  their  customers  to  reject 
documents  if  the  least  irregularity  appeared.  If  the  bank 
followed  its  customer's  demand  and  refused  to  honor  the 
drafts,  it  impaired  the  effectiveness  of  its  commercial 
credit  instruments  in  the  future,  because  the  information 
that  the  bank  had  shown  a  disposition  to  create  difficulties 
would  make  foreign  bankers  unwilling  to  negotiate  further 
drafts  on  the  strength  of  its  commercial  credits.  If  the 
bank  disregarded  its  customer's  demand  and  honored  the 
drafts,  it  preserved  its  good  name  but  occasioned  con- 
troversy and  litigation  with  the  customer.  Thus  all  the 
possibilities  for  dispute  which  had  been  glossed  over  when 
business  was  favorable  came  up  to  plague  the  parties  in 
controversy. 

The  First  Step  Toward  a  Solution 

A  difficulty  that  stood  out  above  all  others,  because  it 
was  present  in  every  overseas  shipment,  revolved  around 
the  question  as  to  what  constituted  shipment  and  what  was 
to  be  regarded  as  evidence  of  shipment.  Before  the  days 
of  steamship  lines,  with  fleets  of  vessels  and  warehouse 
facilities  at  loading  points,  it  was  not  usually  possible  for 
the  vessel-owners  or  agents  to  receive  cargo  until  the  vessel 
was  ready  to  load  it.  As  the  captain  and  mate  were  then 
at  hand,  the  bill  of  lading  was  usually  signed  after  the 
merchandise  had  been  placed  on  board  by  one  of  these 
officials,  who  had  prima  facie  authority  to  bind  the  owners 
in  that  respect.  The  bill  of  lading  was  therefore,  as  its 
name  implies,  a  receipt  for  merchandise  loaded  on  a  named 


24  AMERICAN  COMMERCIAL  CREDITS 

vessel  and  a  contract  to  carry  it  to  the  destination 
indicated. 

With  the  development  of  modern  lines  it  became  the 
practice  of  steamship  companies  to  receive  merchandise  on 
piers.  There  grew  up,  as  a  natural  consequence,  the 
custom  of  issuing,  prior  to  the  loading  of  the  merchandise, 
a  bill  of  lading  signed  by  some  clerk  as  agent  for  the  owner 
of  the  vessel,  which  is  known  as  the  "received-for-ship- 
ment"  bill  of  lading.  So  long  as  this  custom  was  confined 
to  strong  companies  with  frequent  sailings,  its  defects  did 
not  become  apparent,  particularly  as  reputable  lines  usually 
did  not  issue  a  bill  of  lading  until  the  vessel  which  was 
expected  to  carry  the  merchandise  had  arrived  in  port. 
Nevertheless,  the  received-for-shipment  bill  of  lading  was 
in  several  respects  quite  different  in  its  legal  and  practical 
effect  from  the  old  form  of  the  so-called  "shipped"  or  "on- 
board" bill  of  lading,  which  represented  the  merchandise 
as  having  been  placed  aboard  a  specified  ship.  The  signa- 
ture of  an  agent  did  not  carry,  as  did  that  of  the  master  or 
mate,  prima  facie  evidence  of  his  authority  to  bind  the 
carrier.  The  absence  of  the  designation  of  a  specified 
vessel  deprived  the  holder  of  the  bill  of  lading  of  his  right 
to  attach  the  vessel  in  case  the  carrier  failed  to  fulfil  its 
obligation.  The  issuance  of  the  bill  of  lading  before  the 
merchandise  was  loaded  on  board  the  vessel  greatly 
broadened  the  period  between  the  signing  of  the  bill  of 
lading  and  the  arrival  of  the  merchandise  at  the  foreign 
port. 

When  new  steamship  lines  with  limited  capital  and 
infrequent  sailings  adopted  the  new  form  of  bill  of  lading 
its  vices  quickly  became  manifest  to  buyers.  On  the  other 
hand,  it  possessed  a  certain  advantage  to  sellers,  for  it 
gave  them  a  bill  of  lading  as  soon  as  the  merchandise  had 
been  delivered  into  the  custody  of  the  steamship  company. 


AN  OUTLINE  OF  OUR  STUDY  25 

Consequently,  if  this  form  of  bill  of  lading  was  to  be 
accepted  as  freely  as  the  older  form  as  evidence  of  the 
shipment  of  merchandise,  sellers  everywhere  would  bene- 
fit to  the  detriment  of  buyers.  The  result  was  natural 
enough.  Merchants  welcomed  the  new  received-for-ship- 
ment  form  when  they  were  exporters,  and  objected  to  it 
when  they  were  importers.  It  was  in  the  attempt  to  find 
some  means  of  escape  from  the  efforts  of  merchants  to 
blow  both  hot  and  cold  on  this  question,  that  New  York 
bankers  were  induced  to  take  measures  for  the  solution  of 
these  problems. 

The  Conference  of  1920 

The  first  step  was  taken  by  several  of  the  larger  New 
York  banks  naming  a  committee  to  study  the  question. 
After  conferring  with  representatives  of  the  shipping  in- 
terests, this  committee  worked  out  a  plan  which  offered 
foreign  buyers,  on  specific  request,  an  on-board  bill  of 
lading,  and  which  otherwise  recognized  the  received-for- 
shipment  bill  of  lading  that  had  come  into  practically  uni- 
versal use  not  only  here  but  abroad.  Opportunity  was 
taken  at  the  same  time  to  define  some  of  the  terms  which 
were  repeatedly  used  in  commercial  credit  operations.  The 
decisions  of  this  conference  were  embodied  in  a  pamphlet 
entitled  "Regulations  Affecting  Export  Commercial 
Credits  Adopted  by  the  New  York  Bankers  Commercial 
Credit  Conference  of  1920."  These  regulations  were  sub- 
scribed to  by  35  New  York  and  Boston  banks  and  the 
pamphlet  was  distributed  by  them  to  more  than  30,000 
correspondent  institutions  throughout  the  world. 

Standard  Forms  Adopted 

Contrary  to  the  apprehensions  of  many,  the  regulations 
were  favorably  received  abroad.    This  fact,  as  well  as  the 


26  AMERICAN  COMMERCIAL  CREDITS 

advantage  of  the  protection  they  afforded  all  parties  con- 
cerned against  misunderstandings  concerning  matters 
that  had  previously  been  constantly  in  dispute,  en- 
couraged the  belief  that  a  comprehensive  study  of  the 
subject  might  disclose  a  means  of  freeing  commercial 
credit  operations  from  the  confusion  which  has  been 
outlined.  The  ground  work  of  this  plan  was  under- 
taken with  the  co-operation  of  various  foreign  trade 
organizations  by  the  same  bankers'  committee  which 
had  worked  out  the  regulations  of  the  previous  year. 
The  committee  studied  the  question  carefully  from  every 
angle  and  adopted  certain  standard  forms  which  have  the 
joint  approval  of  mercantile  and  banking  interests  and 
which  it  is  one  of  the  purposes  of  this  book  to  explain. 

Recent  Litigation 

We  have,  as  a  heritage  from  the  contract  cancellations 
of  the  postwar  period  and  the  general  haphazard  develop- 
ment of  our  commercial  credit  business,  a  body  of  litiga- 
tion involving  the  rights  and  duties  of  various  parties  to 
commercial  letters  of  credit.  These  recent  decisions  are 
reviewed  in  later  chapters  to  indicate  the  extent  to  which 
the  basic  principles  which  should  govern  the  interpretation 
of  commercial  credits  have  been  brought  into  the  fore- 
ground. 

Protection  of  the  Mercantile  Risk 

Some  of  this  recent  litigation  has  firmly  established 
I  the  principle  that  the  seller  stands  as  beneficiary  of  a  com- 
mercial letter  of  credit  in  a  position  quite  distinct  from  his 
obligation  under  the  contract  of  sale  with  the  buyer — with 
the  somewhat  surprising  result  that  the  seller  can  violate 
the  terms  of  the  contract  of  sale  and  yet  avail  himself  of 
his  rights  under  the  credit,  if  he  complies  with  its  terms. 


AN  OUTLINE  OF  OUR  STUDY  27 

The  natural  result  is  that  the  buyer  seeks  to  prevent  this 
contingency  by  inserting  the  contract  of  sale  verbatim  in 
the  letter  of  credit.  As  a  result,  banks  issuing  credits  for 
their  customers  are  constantly  put  under  pressure  to  insert 
provisions  referring  to  the  contract  of  sale,  expressly  or 
by  implication,  in  whole  or  in  part.  The  same  banks,  in 
buying  bills  or  making  payments  under  other  banks' 
credits,  seek  the  elimination  of  any  reference  to  the  con- 
tract of  sale. 

On  the  whole,  banks  find  that  the  financing  of  an  over- 
seas purchase  is  a  service  which  runs  comfortably  along 
usual  banking  channels,  but  the  interpretation  of  sales 
contracts  is  not.  To  arrange  for  the  scrutiny  of  docu- 
ments and  the  examination  of  merchandise  when  delivered 
by  the  seller — that  is,  to  ascertain  whether  he  has  duly 
performed  his  obligation  under  the  contract  of  sale — is  not 
a  normal  banking  function.  Some  methods  will  therefore 
be  proposed  to  relieve  the  banks  of  this  task  which  they 
properly  seek  to  avoid,  and  yet  afford  the  buyer  some- 
thing more  than  the  unsatisfactory  remedy  of  a  lawsuit 
against  the  seller  to  recover  the  money  received  in  viola-, 
tion  of  the  contract  of  sale. 

The  Purpose  of  This  Book 

It  should  prove  to  be  an  interesting,  though  to  an 
extent  a  difficult  journey,  to  take  the  trail  and  view  the 
unfolding  in  detail  of  the  territory  which  has  now  been 
mapped  out.  It  may  lend  incentive  to  the  venture  to  add 
that  it  is  the  purpose  ot  this  book,  not  ^imply^to  record 
"past  events  but  to  point  the  way  to  the  more  beneficial  use 
of  the  subject  of  its  study.  It  is  proposed  to  narrate  the 
history  of  American  credits,  to  make  a  record  of  the  prob- 
lems involving  these  credits,  which  have  been  considered 
and  solved,  to  indicate  the  way  in  which  our  courts  should 


\ 


28  AMERICAN  COMMERCIAL  CREDITS 

/  view  the  instruments,  and  to  show  the  indispensable  part 
they  will  play  in  the  future  development  of  our  foreign 
trade,  ^tjs  hoped  that  the  present  tendency  to  fiObSP^ 
into  the  hard  and  fast  moulds  of  the  common  law  of  con- 
tracts may  be  stifled.  Commercial  letters  of  credit,  despite 
their  antiquity,  have,  as  stated,  suffered  two  centuries  of 
arrested  development.  They  have  recently  demonstrated 
their  usefulness  under  modern  conditions.  They  now  need 
legal  definition  by  the  application  of  the  same  sagacious 
combination  of  the  law  merchant  and  the  custom  of  mer- 
chants which  has  given  us  the  Uniform  Negotiable  InstFu- 
ments  Law.  The  future  development  of  commercial  credit 
practice  in  this  country,  if  the  instruments  are  recognized 
as  self-sufficient  legal  documents,  will  contribute  to  the 
law  merchant  a  chapter  as  brilliant  as  the  English  courts 
have  written  for  bills  of  exchange. 

The  Future  of  Commercial  Credit  Business 

The  advantages  accruing  from  the  various  movements 
to  make  commercial  credit  operations  move  more  smoothly 
come  at  an  opportune  time.  The  exhausted  economic 
condition  and  the  disturbed  political  state  of  most  of  the 
centers  of  international  trade,  render  it  more  and  more 
imperative  that,  if  foreign  business  is  to  be  conducted 
safely  and  economically,  the  extension  of  credit  must  be 
supervised  and  scrutinized  by  banks  which  are  on  the 
ground.  The  commercial  credit  device  is  peculiarly 
adapted  to  the  attainment  of  their  end.     The  measure  of 

Iour  export  trade  in  the  next  few  years  will  be  the  volume 
of  commercial  credit  business  that  banks  are  willing  to  un- 
dertake. Let  us,  then,  begin  the  examination  of  this 
instrument  upon  the  use  of  which  our  export  trade 
depends. 


CHAPTER  III 

DEFINITION  AND  CLASSIFICATION 

A  General  Definition 

It  has  already  been  said  that  an  instrument  by  which  a 
banker,  for  account  of  a  buyer,  gives  formal  evidence  to 
a  seller  of  its  willingness  to  permit  him  to  draw  on  certain 
terms  and  stipulates  in  legal  form  that  all  such  bills  will 
be  honored,  is  what  has  come  to  be  known  as  a  commercial 
letter  of  credit.  The  conventional  method  employed  by 
authors  of  treatises  on  foreign  trade  to  illustrate  a  com- 
mercial credit  operation,  is  to  use  for  an  example  a  dollar 
credit  issued  by  an  American  bank  for  an  American  buyer, 
directly  to  a  foreign  seller ;  say,  for  a  Boston  wool-buyer 
named  John  Doe,  in  favor  of  a  Buenos  Aires  seller  of  that 
useful  raw  material,  who  is,  for  the  sake  of  local  color, 
named  the  Spanish  equivalent  of  Richard  Roe.  This  type 
of  credit  is  perhaps  the  simplest  to  understand,  particularly 
when  it  is  regarded  from  the  viewpoint  of  the  American 
buyer,  as  he  deals  in  dollars  and  there  is  no  question  of 
foreign  exchange  to  complicate  our  comprehension.  It  will 
be  well,  therefore,  to  start  at  that  point.  However,  the 
simplicity  of  that  method  of  exposition  would  mislead 
us,  unless  we  had  already  fixed  in  our  minds  the  fact  that 
there  is  no  ideal  type  of  commercial  letter  of  credit,  and 
that  the  virtue  of  any  particular  type  depends  entirely 
upon  the  purpose  it  is  expected  to  perform  and  the  condi-> 
tions  which  confront  the  parties  to  it. 

We  must  appreciate  from  the  very  outset  the  not  un- 
important   fact    that    it    is    the    fundamental    simplicity 

29 


1^ 


30  AMERICAN  COMMERCIAL  CREDITS 

at  the  base  of  all  commercial  letter  of  credit  operations 
and  manifesting  itself  in  several  types  of  credits,  suitable 
to  varied  conditions,  which  gives  them  effectiveness  aS 
trade  weapons.  To  gain  this  appreciation,  we  must,  before 
examining  any  particular  type,  ascertain  what  parties  may 
become  connected  with  a  commercial  letter  of  credit  opera- 
tion, the  functions  these  parties  perform,  and  the  purposes 
they  seek  to  accomplish. 

Parties  to  Commercial  Letters  of  Credit 

1.  The  Accredited  Buyer  and  the  Beneficiary. 
The  fundamental  function  of  commercial  letters  of  credit 
is  to  facilitate  the  marketing  of  merchandise.  Their  con^ 
tribution  to  the  process  of  distribution  is  made  by  putting 
the  credit  standing  of  the  buyer  at  the  disposal  of  the 
seller.  The  initiating  party  is  of  necessity  the  buyer,  who 
is  variously  termed  the  "accredited  buyer,"  the  "importer," 
the  "consignee,"  or  the  "account."  The  recipient  is  usually 
the  seller,  and  is  termed  the  "beneficiary,"  or  the  "accredi- 
tee." If  the  buyer's  financial  strength  were  sufficient  to 
make  it  directly  useful  to  the  seller  in  offering  his  bills  for 
discounf,  he  might  put  it  at  the  disposal  of  the  seller  by 
stating  in  writing  that  he  would  honor  drafts  drawn  by  the 
seller  when  accompanied  by  evidence  of  shipment  in  the 
shape  of  ocean  bills  of  lading  and  of  insurance  certifi- 
cates. 

2.  Opening  Bank.  It  is  not  often,  however,  that  a 
foreign  buyer  is  sufficiently  well  known  to  make  his  own 
obligation  suffice  to  enable  the  seller  to  obtain  credit  on  its 
strength.  To  be  effectual  for  that  purpose,  the  promise 
to  accept  the  drafts  must  be  made,  not  by  a  buyer  whose 
reputation  may  be  only  local,  but  by  a  person  or  concern 
enjoying  widely  known  credit.  So  the  buyer  turns  to  some 
bank  in  his  own  locality,  which  has  sufficient  confidence 


DEFINITION  AND  CLASSIFICATION  31 

in  him  to  extend  him  credit  and  which  is  sufficiently  well 
known  abroad  to  make  its  obligation,  evidenced  by  a  com- 
mercial letter  of  credit,  a  useful  credit  instrument  when 
placed  at  the  disposal  of  the  seller. 

There  may  be  a  second  reason  for  bringing  the  buyer's 
bank  into  the  transaction.  The  seller  of  goods  to  a  distant 
country  may  feel  a  natural  reluctance  to  extend  credit  to  a 
buyer,  because  of  the  inherent  difficulty  of  estimating  and 
protecting  credit  at  long  range.  In  this  case  also  the  inter- 
vention of  a  third  party,  with  a  credit  standing  superior  to 
the  buyer,  is  necessary.  This  third  party  is  logically  the 
buyer's  bank.  The  buyer's  bank,  which  undertakes  the 
credit  for  his  account,  is  termed  the  "opening"  bank.  It 
may  assist  in  indicating  the  direction  and  nature  of  the  new 
relationships  which  are  thus  set  up,  to  illustrate  them 
graphically.  We  may  identify  the  accredited  buyer  by  the 
designation  A,  the  beneficiary  by  the  designation  B,  and 
the  opening  bank  by  the  designation  O.  B.  In  this  and 
subsequent  diagrams  we  shall  indicate  the  liability  of  the 
parties  to  each  other  by  arrows,  solid  lines  for  direct 
liability,  and  broken  lines  for  contingent  liability.  We  also 
enclose  each  party  incurring  a  liability  in  a  box,  and  each 
party  playing  a  neutral  role  in  a  circle.  Our  illustration 
will  then  take  this  form : 


O.B. 


<b) 


Figure  i.     Relationship  of  Opening  Bank  (O.  B.)  to  Buyer 
{A)  and  Beneficiary  {B) 

3.  Notifying  Bank.    There  is  a  choice  of  methods  by 
which  the  opening  bank  may  make  such  a  credit  available 


3a  AMERICAN  COMMERCIAL  CREDITS 

to  the  beneficiary.  The  choice,  as  we  shall  later  see  more 
clearly,  depends  largely  upon  whether  the  credit  is  issued 
in  the  currency  of  the  beneficiary  or  that  of  the  accredited 
buyer.  If  the  buyer's  currency  is  the  agreed  medium  of 
exchange,  it  is  likely  that  the  bank  opening  the  credit  will 
evidence  its  willingness  to  finance  the  transaction  by  a 
writing,  addressed  either  to  the  beneficiary  or  to  persons  in 
general,  in  the  expectation  that  some  banker  in  the  domi- 
cile of  the  beneficiary  will  be  induced  thereby  to  advance 
funds  to  him  by  negotiating  his  drafts  drawn  in  accord- 
ance with  the  terms  of  the  credit*  The  opening  bank  may 
prefer,  however,  not  to  notify  the  beneficiary  of  the  exist- 
ence of  such  a  credit  directly,  but  rather  through  the 
medium  of  a  correspondent  in  the  vicinity  of  the  bene- 
ficiary. If  the  opening  bank  requests  a  correspondent  bank 
to  notify  the  beneficiary  of  the  existence  of  the  credit,  the 
correspondent  is  termed  the  advising  or  the  "notifying" 
bank. 

As  the  notifying  bank  is  simply  a  conduit  for  the  pas- 
sage of  instructions,  its  entrance  into  the  transaction 
creates  no  new  credit  relationship.  In  our  graphic  illustra- 
tion we  may  identify  the  new  party,  the  notifying  bank,  by 
the  designation  No.  B.  The  relationship  of  the  four 
parties  will  then  take  this  form: 


O.B. 


Figure   2.     Relationship  of  Buyer    (^4),   Opening   Bank 
(O.  B.),  Notifying  Bank  {No.  B.),  and  Beneficiary  (B) 

4.  Negotiating  Bank.    If  the  notifying  bank,  or  any 
other  bank  in  the  domicile  of  the  beneficiary,  is  voluntarily 


DEFINITION  AND  CLASSIFICATION  33 

induced  by  the  letter  of  credit  to  purchase  the  beneficiary's 
drafts,  it  is  termed  the  "negotiating"  bank.  There  is  intro- 
duced, by  the  act  of  negotiation,  a  new  credit  relationship, 
both  between  the  negotiating  bank  and  the  opening  bank 
and  between  the  negotiating  bank  and  the  beneficiary.  The 
obligation  in  the  latter  relationship  is  a  contingent  liability 
which  we  shall  indicate  by  a  broken  line  but  otherwise 
ignore  for  the  moment,  as  we  shall  deal  with  it  in  Chapter 
XIII,  "Recourse  Against  the  Beneficiary."  The  opening 
bank  has  now  become  liable  to  the  negotiating  bank  as  a 
bona  fide  holder  of  the  beneficiary's  draft,  in  the  same  way 
that  it  is  liable  to  the  beneficiary  as  drawer.  If  we  identify 
the  negotiating  bank  by  the  designation  Ne.  B.,  the  rela- 
tionship of  the  four  parties  concerned  in  this  kind  of  credit 
transactions  may  be  illustrated  diagrammatically  in  the 
following  manner : 


a 


O.B. 


Figure   3.     Relationship   of   Buyer  {A).    Opening   Bank 
(O.  5.),  Negotiating  Bank  {Ne.  B.),  and  Beneficiary  {B) 


5.  Paying  Bank.    When,  because  the  credit  is  issued 
in  the  currency  of  the  beneficiary,  or   for   some  other 
cause,  a  correspondent  in  the  domicile  of  the  beneficiary  is"\ 
instructed  to  pay  the  beneficiary's  drafts,  usually  drawn  in  1 ' 
local  currency  on  itself,  the  correspondent  is  termed  the  ^ 
"paying"  bank.    Of  itself,  the  role  of  paying  bank  creates 
no  credit  relationship,  either  prior  to  payment  or  by  the  act 
of  payment,  if,  as  is  normally  the  case,  the  payment  is 
debited  at  once  to  an  account  maintained  by  the  issuing 
bank  with  the  paying  bank.    This  neutral  relationship  is 


34  AMERICAN  COMMERCIAL  CREDITS 

like  that  of  a  notifying  bank  and  requires  no  separate 
illustration. 

If  the  correspondent  is  instructed  not  to  pay  the  bene- 
ficiary's draft  on  itself  but  to  negotiate  the  beneficiary's 
drafts  on  the  opening  bank  or  the  accredited  buyer,  it  is 
rather  difficult  to  define  completely  the  correspondent's 
position  by  a  phrase.  There  is  at  present  no  general  recog- 
nition of  any  principle  by  which  to  determine  whether  to 
apply  to  this  role  the  term  "negotiating"  or  "paying" 
bank.  It  seems  logical  and  advisable,  however,  to  confine 
the  use  of  the  term  "negotiating"  to  a  bank  which  advances 
funds  to  the  beneficiary  of  its  own  volition,  and  to  apply 
the  term  "paying"  bank  to  a  correspondent  which  either 
pays  or  advances  funds  to  the  beneficiary  at  the  direct  re- 
quest of  the  opening  bank.  In  this  discussion,  the  term 
"paying"  bank  will  therefore  also  be  applied  to  a  cor- 
respondent which  negotiates  the  beneficiary's  drafts  under 
the  opening  bank's  instructions. 

6.  Confirming  Bank.  In  all  the  situations  which 
have  been  thus  far  considered,  the  liability  which  has  made 
the  credit  effective  has  originated  from  the  buyer's  bank, 
which  is  usually  at  a  distance  and  in  a  foreign  land.  The 
beneficiary  may  prefer  to  be  secured  by  the  liability  of  a 
bank  which  is  close  at  hand.  If  a  correspondent  of  the 
opening  bank  in  the  vicinity  of  the  beneficiary  is  instructed 
to  hold  itself  out  to  the  beneficiary  as  being  responsible 
for  payment  of  drafts  drawn  in  accordance  with  its  stipu- 
lations, it  is  called  the  "confirming"  bank.  If  we  identify 
the  confirming  bank  by  the  designation  C.  B.,  our  illus- 
tration will  take  the  form  as  shown  in  the  diagram  in 
Figure  4,  page  35. 

In  this  form  of  credit,  in  addition  to  having  the  direct 
obligation  of  the  confelviirig  bank,  the  beneficiary  has  the 
contingent  liability  of  the  opening  bank,  indicated  in  the 


DEFINITION  AND  CLASSIFICATION 


35 


diagram  by  the  broken  line.  It  will  be  seen,  as  the  subject 
is  further  developed,  that  one  bank  may  fill  several  of  the 
roles  just  described. 


O.B. 


>^C.B. 


Figure  4.     Relationship  of  Buyer  (A),  Opening  Bank  (O.  B.), 
Confirming  Bank  (C.  B),  and  Beneficiary  (B) 


Purposes  of  Commercial  Letters  of  Credit 

There  will  presently  march  past  us  a  seemingly  kaleido- 
scopic succession  of  commercial  credit  forms.  On  close 
inspection  we  will  discover,  however,  that  they  differ — 
some  merely  in  the  manner  of  achieving  the  same  pur- 
poses, and  others  in  the  purposes  achieved.  It  will  be  well, 
therefore,  at  the  outset  to  record  the  fact  that  a  commercial 
letter  of  credit  may  serve  one  or  several  purposes,  both  for 
the  beneficiary  and  for  the  accredited  buyer.  So  far  as 
the  beneficiary  is  concerned,  it  always  serves,  in  the  first 
place,  to  enable  him  to  finance  the  transaction  during  the 
transit  of  the  merchandise.  A  seller  who  lacks  sufficient 
financial  strength  to  assemble  merchandise  and  carry  it 
through  the  period  of  transit  to  its  destination,  may  find  an 
all-sufficient  purpose  in  a  credit  which  enables  him  to 
undertake  a  foreign  sale  by  utilizing  the  buyer's  credit 
standing  alone  for  that  purpose. 

If,  however,  the  beneficiary  is  seeking  a  commercial 
credit  for  a  second  purpose — to  obtain  some  better  pro- 
tection of  the  credit  risk  than  is  afforded  by  the  buyer's 
promise  to  pay — he  will  require  a  credit  in  which  an  open- 


36  AMERICAN  COMMERCIAL  CREDITS 

ing  bank,  and  preferably  a  confirming  bank  also,  have 
added  their  commitment  to  the  transaction.  For  the  seller, 
then,  a  commercial  credit  serves  the  primary  purpose  of 
financing  the  shipment,  and  may  serve  a  secondary  purpose 
f  safeguarding  the  credit  risk. 

The  commercial  letter  of  credit  has  also  certain  ad- 
^  vantages  for  the  buyer.     It  may  afford  him  a  means  of 
using  his  purchase  as  security  to  obtain  the  credit  neces- 
r     sary  to  finance  the  transaction.    A  documentary  commer- 
'      cial  letter  of  credit  is  automatically  self -securing,  because 
the  opening  bank's  credit  or  funds  are  placed  at  the  dis- 
posal of  the  beneficiary  in  exchange  for  negotiable  shipping 
documents  conveying  control  of  the  merchandise.     For 
this  reason  the  opening  bank  may  be  willing  to  issue  such 
a  letter  of  credit  for  a  buyer  to  whom  it  would  not  will- 
ingly make  a  loan,  without  security,   for  an  equivalent 
amount. 

The  second  purpose  of  the  letter  of  credit  from  the 
.buyer's  standpoint  is  to  obtain  the  funds  to  finance  the 
transaction  in  the  cheapest  market.  Even  where  the  ques- 
tion of  security  is  unimportant,  the  use  of  the  type  of 
commercial  letter  of  credit  which  provides  that  either  the 
opening  bank  or  its  correspondent  in  some  one  of  the 
world's  money  markets  will  accept  the  beneficiary's  time 
drafts,  will  result  in  obtaining  the  funds  to  finance  the 
trade  at  the  most  favorable  rate,  because  the  accepted  draft 
will  become  "prime"  paper,  immediately  salable  in  the 
discount  market. 
\  The  same  commercial  letter  of  credit  may  be  made 

\  then  to  serve  four  purposes :  two  for  the  seller — as  a  means 
M  of  obtaining  funds  and  as  a  security  for  payment ;  and  two 
^   \for  the  buyer — as  a  method  of  securing  and  of  economically 
financing  the  transaction.     Not  all  forms  of  commercial 
letters  of  credit  serve  all  these  purposes.     The  sort  of 


DEFINITION  AND  CLASSIFICATION  37 

credit  to  be  utilized  depends,  as  will  later  be  apparent,  upon 
the  purpose  or  purposes  to  be  accomplished. 

Difficulty  of  Classifying 

Commercial  letters  of  credit  are  as  flexible  as  the  minds 
of  merchants  are  ingenious.  There  are  no  terms  of  sale 
to  which  they  cannot  be  adapted.  It  must  be  borne  in 
mind  that  the  device  is  adaptable  to  an  infinite  variety  of 
combinations,  and  that  the  general  classifications  which  are 
made  are  intended  to  illustrate,  rather  than  to  limit,  the 
possibilities  of  adaptation.  , 

The  lack  of  lucidity  and  comprehensiveness  in  most/ 
discussions  of  commercial  letters  of  credit  has  resulted! 
from  the  attempt  to  classify  them  as  "import"  and  "ex- 
port" credits.  Every  commercial  credit  is  an  export  credit 
to  the  seller  and  an  import  credit  to  the  buyer.  The  use 
of  either  term  is  not  a  classification,  but  the  indication  of  a 
point  of  view.  Analysis  of  any  given  commercial  credit 
will  disclose  the  fact  that  it  may  be  classified  in  several 
ways — according  to  the  method  of  transmission,  the  dura- 
tion of  the  credit,  the  identity  of  the  obligor,  the  method 
of  payment,  the  method  of  reimbursement,  and  the  pro- 
vision for  renewal.  At  any  given  time,  because  of  exist- 
ing market  and  exchange  conditions,  the  credits  demanded 
and  received  by  a  nation's  exporters  may  differ  with  re- 
spect to  one  or  more  of  the  several  features  from  the 
credits  furnished  to  foreign  sellers  by  the  nation's  im- 
porters ;  that  is,  however,  a  transitory  circumstance  which 
is  without  value  for  the  purpose  of  analyzing  the  func- 
tions performed  by  the  letter  of  credit.  These  functions 
must  first  be  briefly  defined,  so  that  subsequently  intelligent 
consideration  can  be  given  to  the  combinations  of  func- 
tions that  the  credit  should  perform  to  meet  various 
circumstances. 


38  AMERICAN  COMMERCIAL  CREDITS 

1.  Classification  According  to  the  Method  of  Trans- 

mission 

Circular  and  Specially  Advised.  The  opening 
bank  has  a  choice  of  methods  of  transmitting  the  commer- 
cial letter  of  credit  to  the  beneficiary.  It  may  evidence  its 
obligation  by  issuing  a  w^riting,  addressed  to  persons  in 
general,  in  which  it  undertakes  to  honor  the  beneficiary's 
drafts  under  certain  stipulated  conditions.  This  instru- 
ment may  either  be  mailed  by  the  issuing  bank  to  the 
beneficiary  or  delivered  by  the  issuing  bank  to  the  ac- 
credited buyer  to  be  mailed  by  him  to  the  beneficiary.  In 
either  event  it  is  termed  a  "circular"  letter  of  credit.  This 
type  of  credit  is  illustrated  by  Figure  i  (page  31).  The 
opening  bank  may  choose,  instead,  to  transmit  the  credit 
to  the  beneficiary  through  the  medium  of  its  correspondent 
in  his  vicinity.  In  that  event  it  is  usually  contemplated 
that  the  payment  or  negotiation  of  the  beneficiary's  drafts 
will  be  undertaken  by  the  notifying  correspondent  and 
such  a  credit  is  termed  "specially-advised."  It  is  illus- 
trated by  Figure  2  (page  32). , 

2.  Classification  According  to  Duration 

Revocable  and  Irrevocable.  If  it  is  the  intention  of 
the  opening  bank  to  leave  the  duration  of  the  credit  open 
for  subsequent  consideration,  and  thus  reserve  the  right 
to  withdraw  from  the  transaction,  the  credit  will  state  that 
it  is  "good  until  canceled,"  or  good  until  a  stipulated  date 
"unless  sooner  revoked,"  or  some  like  phrase.  Such  a 
credit  is  termed  "revocable."  If  it  is  the  intention  of  the 
opening  bank,  on  the  contrary,  to  waive  the  right  to  cancel 
or  revoke  the  credit  prior  to  the  date  specified,  unless  the 
consent  of  the  beneficiary  is  obtained,  the  credit  will 
contain  a  statement  to  that  effect  and  will  be  termed 
"irrevocable."  ». 


DEFINITION  AND  CLASSIFICATION  39 

3.  Classification  According  to  Obligation 

Unconfirmed  and  Confirmed.  If  the  notifying 
bank  is  merely  requested  to  act  as  the  medium  through 
which  the  opening  bank's  obligation  is  transmitted  to  the 
beneficiary,  its  letter  of  advice  does  nothing  more  than 
guarantee,  without  any  other  obligation  on  its  part,  the 
authenticity  of  the  message  it  is  transmitting  on  behalf 
of  its  principal,  the  opening  bank.  Such  a  credit  is  termed 
an  "unconfirmed"  credit.  If,  however,  the  opening  bank 
desires  the  notifying  bank  to  give  to  the  beneficiary  its  own  ^ 
assurance  also  that  the  opening  bank's  obligation  will  be 
performed,  the  notifying  bank  will  not  simply  transmit 
but  will  can^nn  the  opening  bank's  obligation  by  making 
it  also  its  own  undertaking,  or  commitment,  or  guaranty, 
or  obligation,  as  one  prefers  to  call  it.  It  is  illustrated 
by  Figure  4  (page  35). 

Such  a  credit  is  termed  a  "confirmed"  credit  under  the 
accepted  American  usage  of  the  term.  It  is  not,  however, 
in  accord  with  British  terminology.  British  banks,  for 
reasons  which  will  later  be  examined  in  detail  and  which 
are  fundamentally  historical  rather  than  logical,  use  the 
term  "unconfirmed,"  as  synonymous  with  "revocable,"  and 
the  term  "confirmed,"  in  conjunction  with  the  word 
"bankers,"  as  synonymous  with  "irrevocable."  The  term 
"confirmed"  of  itself  has  no  greater  significance,  accord- 
ing to  a  recent  British  writer,  than  the  word  "advised," 
although  he  admits  that  some  misinformed  British  bankers 
and  merchants  disagree  with  him  on  that  point.^ 

4.  Classification  According  to  Method  of  Payment 

(a)  Negotiation  and  Straight.  If  the  letter  of 
credit  is  circular  in  form,  its  effectiveness  is  derived  from 


*  W.  F.  Spalding,  Bankers'  Credits,  London,  1921,  p.  56. 


40  AMERICAN  COMMERCIAL  CREDITS 

the  inducement  it  offers  some  banker  in  the  domicile  of  the 
beneficiary  to  negotiate  the  beneficiary's  drafts,  either  on 
the  opening  bank  or  some  bank  designated  by  it.  If  the 
drafts  are  to  be  drawn  in  the  currency  of  the  beneficiary's 
community,  the  only  benefit  the  local  negotiating  bank  will 
derive  will  be  the  interest  and  commission  deducted  from 

/  the  drafts  as  a  discount.  If  the  drafts  are  to  be  drawn  in 
a  foreign  currency,  the  negotiating  bank  will  also  derive 
a  profit  from  the  exchange  rate  applied  by  it  to  the  con- 
version of  the  foreign  currency  in  which  the  draft  is 
drawn  into  the  local  currency,  which  the  beneficiary  re- 
quires for  his  local  needs.  Such  a  credit  is  in  either  event 
termed  a  "negotiation"  credit.  The  relations  of  the  parties 
are  indicated  by  Figure  3  (page  33). 

If  the  credit  is  specially  advised,  the  notifying  bank 
(if  it  is  also  made  the  paying  bank  under  instructions  from 
the  opening  bank)  will  either  pay  sight  drafts  on  itself  or 
else  advance  the  face  amount  of  the  drafts  drawn  on  some 
other  drawee,  usually  the  buyer.  Such  a  credit  is  termed 
a  "straight"  credit.  It  is  illustrated  by  Figure  2  (page  32) . 
,The  essential  difference  between  this  credit  and  the  nego- 

/tiation  credit  is  that  in  the  latter  instance  the  beneficiary, 

I  armed  with  the  instrument,  must  seek  out  a  bank  which 
vy   will  be  induced  to  negotiate  his  draft  and  must  bear  the 
cost  of  negotiation,  while  in  the  former  instance  the  duty  is 
put  on  the  paying  bank  selected  by  the  opening  bank  to 

I  furnish  the  funds  to  the  beneficiary  by  paying  his  draft 
or  advancing  funds  at  the  expense  of  the  buyer. 

(b)  Sight  and  Acceptance.  If  the  beneficiary's 
drafts  are  drawn  at  sight  the  credit  is  termed  a  "sight" 
credit.  Once  paid,  the  drafts  serve  simply  as  receipts  for 
payment  and  are  without  value  for  any  other  purpose.  If 
the  accredited  buyer  and  the  opening  bank  want  to  use  the 
drafts  as  a  means  by  which  to  obtain  funds  for  financing 


DEFINITION  AND  CLASSIFICATION  41 

the  transaction  out  of  a  discount  market,  the  credit  will 
stipulate  that  the  drafts  be  drawn  at  time,  for  acceptance, 
upon  some  well-reputed  bank  in  a  center  of  international 
finance.  Such  a  credit  is  termed  an  "acceptance"  credit. 
The  draft  is  discounted  after  acceptance  and  the  bene- 
ficiary is  thereby  immediately  placed  in  funds,  though  the 
accredited  buyer  need  not  furnish  funds  to  pay  the  draft 
until  its  maturity. 

(c)  Local  Currency  and  Foreign  Currency.  A 
credit  which  stipulates  that  drafts  are  to  be  drawn  in  the 
currency  of  the  domicile  of  the  beneficiary  is  a  "local 
currency"  credit,  while  a  credit  which  stipulates  that  drafts 
are  to  be  drawn  in  a  foreign  currency,  whether  that  of  the 
accredited  buyer  or  not,  is  a  "foreign  currency"  credit. 

5.  Classification  According  to  Method  of  Reimburse- 
ment 

Simple  and  Reimbursement.  Normally  an  opening 
bank  which  instructs  a  correspondent  to  act  as  the  paying 
bank,  under  a  commercial  letter  of  credit,  carries  an  ac- 
count, in  the  currency  to  be  paid,  with  the  paying  bank. 
The  amount  of  the  payment  made  to  the  beneficiary,  plus 
the  paying  bank's  commission  for  the  service  performed, 
is  debited  to  this  account.  Such  a  credit  is  termed  a 
"simple"  credit. 

Occasionally,  however,  the  opening  bank  may  not  have 
an  account  with  the  correspondent  it  chooses  as  paying 
bank,  or,  having  an  account,  may  prefer,  for  reasons 
which  will  be  discussed  later,  not  to  have  it  debted.  In 
such  case  the  paying  bank  will  draw  a  draft  for  the 
amount  of  its  payment,  with  commission  and  interest  for 
the  period  elapsing  until  reimbursement,  either  on  the 
opening  bank  or  on  a  correspondent  of  the  opening  bank 
with  which  the  opening  bank  carries  an  account.     Such 


\ 


) 


42  AMERICAN  COMMERCIAL  CREDITS 

a  credit  is  termed  a  "reimbursement"  credit.  If  we  desig- 
nate the  paying  bank  by  the  initials,  P.  B.,  the  relationship 
of  the  parties  to  such  a  credit,  during  the  interval  between 
payment  and  reimbursement,  is  as  represented  in  Fig- 
ure 5 : 


O.B. 


e 


Figure  5.     Relationship  of  Parties  in  a  Reimbursement 

Credit 

6.  Classification  According  to  Provision  for  Renewal 

Revolving  Credits — Cumulative  and  Non-Cumu- 
lative. The  opening  bank  may  be  willing  to  finance 
aggregate  shipments  which  will  exceed  the  amount  of 
credit  it  is  willing  to  have  outstanding  at  one  time  for 
the  accredited.  Instead  of  issuing  a  credit  for  the  amount 
to  which  it  is  prepared  to  commit  itself  and  then  estab- 
lishing a  new  credit  after  the  first  has  been  exhausted 
and  liquidated,  a  single  commercial  letter  of  credit  may 
be  given  a  life  sufficient  to  cover  the  period  of  time 
necessary  to  complete  the  transaction,  with  the  restric- 
tion that  the  amount  of  money  named  in  the  credit  shall 
not  exceed  at  any  given  time  the  limit  set.  This  result 
is  accomplished  by  limiting  it  to  the  amount  agreed, 
with  the  proviso  that  upon  notice  from  the  opening  bank 
that  any  draft  which  the  beneficiary  has  drawn  within 
that  limit  has  been  paid  and  retired  by  the  accredited,  a 
like  sum  becomes  again  available  to  the  beneficiary.  Such 
a  credit  is  termed  a  "revolving"  credit. 

Sometimes  the  limitation  is  fixed  by  stipulating  that 
the  beneficiary  may  avail  himself  of   not  more  than  a 


DEFINITION  AND  CLASSIFICATION  43 

certain  fixed  amount  within  a  given  period,  say  one  month, 
over  a  period  of  months.  Such  a  credit  it  called  a 
"monthly  revolving"  credit  and  should  stipulate  whether 
it  is  "non-cumulative,"  in  which. case  any  amount  unused 
during  the  month  lapses,  or  "cumulative,"  in  which  case 
amounts  not  used  in  one  month  are  available  in  succeed- 
ing months. 

Authority  to  Purchase 

Akin  in  many  respects  to  the  commercial  letter  of 
credit  and  regarded  by  some  as  a  true  credit  in  revocable 
form,  is  the  "authority  to  purchase."  It  is  an  authority 
given  by  a  buyer  to  a  seller  to  draw  documentary  drafts 
on  the  buyer,  coupled  with  a  request  by  the  buyer  ta^ 
his  bank  to  inform  the  seller  of  that  fact  and  to  arrange' 
for  the  purchase  of  the  drafts,  which  the  buyer  agrees 
to  accept.  The  issuance  of  such  an  authority  constitutes 
no  engagement  whatsoever  on  the  part  of  the  bank  to 
the  beneficiary,  but  indicates  the  belief  of  the  bank 
that  the^  drafts  will  be^duly^  cared  for  by  the  buyer.  If 
it  may  be  regarded  as  a  true  credit  in  revocable  form, 
the  undertaking  runs,  not  to  the  seller,  but  to  the  cor- 
respondent bank,  and  is  an  undertaking,  not  that  the 
seller's  drafts  will  be  paid,  but  that  the  correspondent 
bank  will  be  reimbursed  for  any  outlay  it  makes  there- 
under. There  has  also  been  in  use  an  anomalous  instru- 
ment called  a  "confirmed  irrevocable  authority  to 
purchase,"  which  is  to  all  intents  and  purposes  a  confirmed 
and  irrevocable  commercial  letter  of  credit,  differing  only 
in  the  respect  that  the  drafts  are  drawn,  without  recourse, 
on  the  buyer,  instead  of  on  the  paying  bank.  The  use 
of  this  latter  instrument  is  now  being  replaced  by  the 
"confirmed  irrevocable"  letter  of  credit,  which  is  a  step 
in  the  interest  of  clarity. 


U-- 


44  AMERICAN  COMMERCIAL  CREDITS 

Various  Combinations 

Now  that  we  have  acquainted  ourselves  with  the  desig- 
nations of  the  parties  to  commercial  letters  of  credit, 
learned  what  purposes  these  parties  may  be  seeking  to 
accomplish  by  the  use  of  the  instruments,  and  become 
aware  of  their  basic  classifications,  we  are  prepared  to 
survey  the  commercial  letter  of  credit  business  as  it 
developed   in  the  United   States  after    1914. 


CHAPTER  IV 

THE  ABSENCE  OF  A  STANDARD  PRACTICE 

American  Banks  Unprepared  for  Task 

When  foreign  bankers  set  themselves  to  the  task  of  \ 
supplying  commercial  letters  of  credit  to  the  foreign 
purchasers  who  turned  to  the  United  States  for  goods 
as  the  doors  of  the  European  markets  closed,  they  sought 
the  intervention  of  the  banks  of  the  United  States  as 
notifying,  paying,  and  negotiating  banks.  It  was  a  novel 
task  for  them. 

Previously,  foreign  merchants  had  bought  elsewhere 
and  had  financed  their  purchases  in  London,  Paris,  or 
Berlin.  So,  too,  had  American  merchants.  The  pound 
sterling  has  been  the  universally  accepted  medium  of 
international  exchange.  It  was  natural  that  in  business 
between  England  and  her  colonies  and  colonial  posses- 
sions, buyer  and  seller  should  quote  in  that  currency. 
But  it  did  not  stop  there.  If  a  wool  merchant  in  Boston 
bought  wool  from  Buenos  Aires,  the  Bostonian  might 
want  to  pay  in  dollars  and  the  Argentinian  to  receive 
his  payment  in  pesos.  The  Bostonian  would  have  diffi- 
culty, however,  in  finding  anyone  in  Boston  who  was  in 
position  to  sell  him  pesos.  The  Argentinian,  on  the 
other  hand,  would  have  difficulty  in  finding  anyone  in 
Buenos  Aires  who  needed  dollars.  The  natural  result 
was  that  both  turned  to  a  medium  which  was  easily  pur- 
chasable in  Boston  and  readily  salable  in  Buenos  Aires. 
The  Argentinian  quoted  in  sterling  and  the  Bostonian 
bought  in  sterling. 

45 


46  AMERICAN  COMMERCIAL  CREDITS 

The  universal  popularity  of  sterling  was  not  the  sole 
reason  why  sterling  credits  were  employed.  The  reputa- 
^  tion  of  American  banks  did  not  at  that  time  extend 
beyond  our  own  borders.  They  were,  for  instance,  so 
little  known  in  Buenos  Aires  that  the  promise  of  an 
American  bank  that  the  Argentinian's  draft  would  be 
honored  on  presentation  to  the  London  correspondent 
of  the  American  bank  might  not  be  a  sufficient  inducement 
to  Argentinian  bankers  to  make  the  drafts  freely  negotia- 
ble. London  bankers,  on  the  other  hand,  were  known 
by  merchants  and  bankers  everywhere  and  their  promise 
to  honor  drafts  was  a  sufficient  inducement.  Prior  to 
1914,  over  95  per  cent  of  American  import  credits  were 
opened  in  sterling  and  advised  to  the  beneficiary  by 
London  banks,  which  also  accepted  and  paid  the  drafts 
for  the  account  of  the  American  bank.  The  part  played 
by  the  American  bank  in  these  operations  was  simple 
indeed.  Figure  6  reproduces  a  letter  of  the  National 
City  Bank  of  New  York,  which  indicates  that  a  brief 
cable  to  London  completed,  except  for  the  exchange 
feature,  the  American  bank's  part  in  such  a  commercial 
operation.  There  was  little,  therefore,  in  the  way  of 
experience,  custom,  or  practice  to  assist  American  banks 
in  playing  the  new  role  imposed  upon  them  by  the 
war. 

Foreign  Practice  Not  Uniform 

It  would  have  taken  a  well-entrenched  American 
commercial  credit  practice,  in  any  event,  to  have  pre- 
vented foreign  bankers  from  pursuing  the  natural  course 
of  seeking  to  deal  with  us  in  the  way  that  they  had 
previously  dealt  elsewhere.  Had  there  been  anything 
approaching  standard  forms  of  commercial  letters  of 
credit  and   a  uniform   practice  throughout  the   rest   of 


THE  ABSENCE  OF  A  STANDARD  PRACTICE         47 


THE  NATIONAL  CITY  BANK 

OF  New  York 
Foreign  Exchange  Department 


New  York,  January  5,  1900 


Messrs.  M.  Guggenheim's  Sons, 

New  York 

Dear  Sirs: 

In  accordance  with  the  conversation  we  had  this  morning 
with  your  Mr.  I.  Guggenheim,  we  shall  open  a  revolving  credit 
in  your  behalf  with  the  Deutsche  Bank  (Berlin)  London 
Agency,  London,  by  cable  for  £50,000.-/-  as  follows : 

"Open  a  revolving  credit  in  favor  of  Beeche  &  Co.,  Val- 
"paraiso,  for  £50,000.-/-  for  a/c  of  M.  Guggenheim's 
"Sons,  for  payments  to  Cia  Huanchaca  de  Bolivia,  against 
"drafts  @  90  d/s  without  documents.  Confirm  by  tele- 
"  graph  through  Banco  Aleman  Transatlantico,  Val- 
"paraiso" 

and  an  additional  revolving  credit  for  £50,000.-/-  on  the 
same  terms,  conditions,  etc.,  we  shall  open  by  mail,  to  be  con- 
firmed by  letter  or  by  cable  from  London. 

You  will  oblige  us  by  signing  the  enclosed  Agreements 
and  returning  same  to  us  in  due  course. 


Yours  truly, 


Figure  6.     South  American  Sterling  Credit  Opened  through  London 


48     '  AMERICAN  COMMERCIAL  CREDITS 

the  world,  our  task  would  have  been  simpler  and  this 
discussion  would  have  been  shorter.  It  was  in  London 
that  the  world's  commercial  letter  of  credit  business  had 
centered,  due,  first,  to  the  presence  there  of  innumerable 
joint-stock  banks,  private  banks,  foreign  and  colonial 
bank  agencies,  merchant  banks,  and  merchants  of  inter- 
national repute,  who  acted  as  acceptors  of  the  drafts 
drawn  under  commercial  credit  arrangements;  and  sec- 
ond, to  the  existence  of  a  broad  discount  market  in 
which  the  proceeds  of  these  drafts  were  made  immediately 
available.  It  is  in  London  that  one  would  expect  to 
find,  therefore,  that  the  melting  pot  had  operated  to 
produce  uniformity.  But  it  takes  the  heat  generated 
by  the  insistent  pressure  of  necessity  to  fuse  national 
habits  into  an  international  mould.  Circumstances  had 
never  operated  to  bring  this  force  into  play  on  London's 
commercial  letter  of  credit  business,  and  so,  even  there, 
the  subject  is  today  shrouded  in  complexities  and  difficult 

problems. 

» 

The  British  Practice 

The  most  widely  known  and  respected  bankers  in 
the  world  had  offices  in  London  and  the  ramifications  of 
British  trade  and  shipping  had  created  a  demand  for 
sterling  bills  which  made  them  salable  everywhere.  The 
agreement  of  one  of  these  internationally  known  bankers 
to  honor  drafts  drawn  upon  it  when  presented  at  its 
office  in  London  was  sufficient  to  induce  some  banker 
in  any  trade  port,  however  remote,  to  negotiate  these 
drafts.  It  was  expected,  and  rightfully,  that  local  bankers 
would  bid  against  one  another  for  these  bills,  in  order 
to  obtain  the  profit  on  the  rate  at  which  the  bills  would 
be  converted  into  the  local  currency,  which  was  sought 
by  the  beneficiary  who  drew  them.    Consequently,  British 


THE  ABSENCE  OF  A  STANDARD  PRACTICE         49 

bankers'  credits  were  generally  alike  in  taking  what  is 
termed  the  "negotiation"  form.  That  is,  they  were  an 
undertaking  with  anyone  who  might  be  induced  to  nego- 
tiate the  beneficiary's  drafts,  drawn  in  accordance  with 
the  terms  of  the  credit,  that  those  drafts  would  be  duly 
honored  on  presentation  at  their  banking  house  in  Lon- 
don. 

If  the  credit  was  intended  to  finance  an  importation 
into  England  for  an  English  customer,  the  importer,  if 
he  were  big  enough,  would  approach  one  of  the  London 
accepting  bankers  directly;  if  he  did  not  enjoy  direct 
contact  with  the  large  accepting  banks,  he  would  make 
his  credit  arrangement  with  his  local  bank,  which,  in 
turn,  would  avail  itself  of  the  services  of  a  London 
acceptance  bank. 

Circular  Negotiation  Credit  Instrument 

It  was  rather  a  frequent  practice  for  the  opening 
bank  to  put  the  credit  in  the  form  of  an  instrument 
addressed  by  it  directly  to  the  beneficiary.  Figure  7 
illustrates  this  form  of  credit  and  indicates  how  the 
financing  of  shipments  that  did  not  pass  through  London 
was  arranged. 

This  sort  of  instrument  was,  at  times,  mailed  by 
the  opening  bank  directly  to  the  beneficiary.  If  the 
opening  bank  had  a  branch  or  correspondent  in  the 
domicile  of  the  beneficiary,  it  was  usually  mailed  to  it 
to  be  delivered  to  him.  The  latter  course  enabled  the 
local  branch  or  correspondent  to  vouch  for  the  authen- 
ticity of  the  signatures,  and  also  to  bid  for  the  purchase 
of  the  drafts.  The  general  custom,  however,  was  not 
to  follow  either  of  these  courses,  but  to  deliver  the 
instrument  to  the  accredited  buyer,  who  mailed  it  to 
the  beneficiary. 


50  AMERICAN  COMMERCIAL  CREDITS 


CREDITO  ITALIANO 

London  Branch 
L/Cr.  No.  . . .  0000/ oooo  ...         22,  Abchurch  Lane,  E.  C.  4, 

G.P.O.  Box  453 


6ih  April,  1Q20 


Ecuadorian  Export  Company, 
Bahia  de  Caraquez,  Ecuador 

Gentlemen: 

Please  note  that  a  Confirmed  Credit  has  been  opened  with 
us  in  your  favor  for  account  of  the  ....  Italian  Import  Com- 
pany, ....  up  to  ... .  £3,000  {Three  Thousand  Pounds) 

Drafts  are  to  be  drawn  on  us  at  ...  .  sight  ....  against 
the  following  documents:  Full  set  of  Bills  of  Lading  to  the 
order  of  shipper,  blank  indorsed;  Policies  of  Insurance  covering 
ordinary  marine  and  war  risk;  also  invoice  relating  to ...  .  One 
shipment  of  50  tons  {500  bags)  Shelled  Corozo  Nuts  at  £60  per  ton, 
shipped  from  Bahia  Mar  eta  {Ecuador)  to  Genoa  hy  direct  steamer 

during  May/ June,  1920 Drafts  must  state  that  they 

are  drawn  under  Letter  of  Credit  No 0000/0000  .  .  . . 

We  hereby  engage  with  you  as  well  as  with  the  indorsers 
and  bona  fide  holders  of  drafts  drawn  under  this  authority 
that  such  drafts  shall  be  honored  on  presentation,  provided 
due  compliance  has  been  made  with  the  above  conditions. 

Very  truly  yours, 

Credito  Italiano, 


,  Manager 


Figure  7.     Circular  Negotiation  Credit 


THE  ABSENCE  OF  A  STANDARD  PRACTICE         51 

Cabled  Circular  Negotiation  Credit 

All  these  methods  of  transmission  were  inadequate 
when  time  was  pressing.  The  time  consumed  in  send- 
ing a  credit  instrument  by  mail  from  London  to,  for 
example,  the  Far  East,  was  often  too  long  to  enable  the 
instrument  to  be  in  the  hands  of  the  beneficiary  at  the 
time  shipment  was  made  and  the  drafts  were  drawn. 
The  accredited  buyer  sometime  surmounted  this  difficulty 
by  delivering  the  instrument  to  the  beneficiary's  agent 
in  London,  who  cabled  its  major  details  to  the  beneficiary. 
If  the  beneficiary  was  reputable,  Far  Eastern  banks  would 
negotiate  his  drafts  on  the  strength  of  such  a  cable. 
This  practice  not  only  left  the  door  open  to  fraud,  but 
gave  possible  occasion  for  honest  controversy  when,  as 
sometimes  happened,  the  shortened  cable  message  had 
omitted  some  important  stipulation  contained  in  the  com- 
plete instrument. 

This  latter  difficulty  could  be  avoided  by  having  the 
full  details  of  the  credit  cabled  by  the  opening  bank 
directly  to  the  beneficiary.  Scandinavian  banks  have 
attempted  recently  to  adopt  this  course  in  opening  com- 
mercial credits  in  the  United  States.  Such  a  cable,  sent 
to  an  American  export  company  during  1920,  read: 

Account  Foreign  Import  Company  here,  we  will  honor  your 
three  months  draft  about  fifty  thousand  dollars  against  invoice 
ladings  marine  mine  policy  six  hundred  tons  bessemer  rods  at 
ninety  dollars  per  ton  of  one  thousand  sixteen  kilos  cif  Copen- 
hagen discount  bill  stamp  for  buyers  account  (stop)  Credit 
irrevocable  until  February  twenty-eighth. 

This  practice,  however,  is  still  open  to  objections. 
For  one  thing,  there  is  no  way  in  which  either  the 
beneficiary  or  the  bank  to  whom  he  displays  the  cable 
for  the  purpose  of  persuading  it  to  negotiate  his  drafts, 


52  AMERICAN  COMMERCIAL  CREDITS 

can  authenticate  the  message.  Neither  is  there  any  way 
in  which  the  negotiating  bank  can  be  satisfied  that  the 
beneficiary  has  not  already  displayed  the  cable  to  a  com- 
petitor and  negotiated  another  draft. 

The  following  is  a  description  of  an  actual  instance 
of  this  sort  which  had  serious  consequences  for  the 
opening  bank.  The  credit  had  been  cabled  to  the  bene- 
ficiary by  the  opening  bank,  which  also  mailed  an  instru- 
ment to  the  beneficiary,  containing  the  usual  recital  that 
the  amount  of  drafts  negotiated  thereunder  was  to  be 
noted  by  the  negotiating  bank  on  the  reverse  side  of  the 
credit.  Upon  receipt  of  the  cable  the  beneficiary  nego- 
tiated his  draft  with  a  local  banker.  When  the  instru- 
ment arrived  he  negotiated  a  similar  draft  with  a  second 
local  banker,  who  noted  the  amount  on  the  reverse  side 
of  the  credit.  The  opening  bank  honored  the  first  draft 
on  presentation.  Although  it  at  first  refused  to  honor 
the  second  draft,  it  was  subsequently  compelled  to  do  so. 
The  decision  was  based  upon  the  ground  that  the  first 
draft  had  been  presented  to  it  so  shortly  after  the  mail- 
ing of  the  instrument  that  it  had  constructive  notice  that 
it  could  not  have  been  noted  on  the  reverse  side  of  the 
instrument.  The  opening  bank  had,  therefore,  to  bear 
the  loss  which  otherwise  would  have  fallen  upon  the 
bank  which  had  negotiated  the  second  draft  in  good  faith. 

Specially  Advised  Negotiation  Credit 

Even  though  the  credit  is  to  be  opened  by  mail  and 
there  is  time  for  the  opening  bank  to  mail  its  instrument 
directly  to  the  beneficiary,  it  is  perhaps  simpler,  if  the 
opening  bank  has  a  branch  or  correspondent  in  the 
vicinity  of  the  beneficiary,  for  the  opening  bank  to  instruct 
that  branch  or  correspondent  by  letter  to  notify  the  bene- 
ficiary that  the  credit  has  been  established.     If  the  credit 


THE  ABSENCE  OF  A  STANDARD  PRACTICE         53 

is  to  be  opened  by  cable,  the  use  of  this  specially  advised 
method  has  distinct  advantages.  The  branch  or  corre- 
spondent is  in  possession  of  a  set  of  agreed  test  words, 
by  which  the  identity  of  the  sender  and  the  correctness 
of  the  amount  of  the  credit  can  be  verified.  One  form 
of  cable  utilized  by  a  London  bank  in  instructing  its 
United  States  correspondent  in  this  fashion  reads : 

Account  Foreign  Import  Company,  advise  American  Export 
Company,  Providence,  Rhode  Island,  by  telegram  we  open  con- 
firmed credit  his  favor  available  until  first  July  up  to  ii,ooo 
against  invoices  ladings  marine  war  insurance  policies  sixty 
casks  crystals  thirty  cents  pound  cif. 

These  instructions  were  intended  to  authorize  the 
correspondent  to  do  no  more  than  notify  the  beneficiary 
of  the  existence  and  details  of  the  credit.  It  is  of  the 
type  illustrated  by  Figure  2  (page  32).  The  advantage 
to  the  beneficiary  of  this  method  of  transmission  is  that 
he  is  assured  of  the  authenticity  of  the  credit.  The 
notifying  bank  is  benefited  also  by  being  aflForded  an 
opportunity  to  suggest  to  the  beneficiary  that  he  offer 
the  bills,  when  drawn,  to  it  for  negotiation. 

To  attain  complete  safety,  it  is  advisable  to  carry  the 
specially  advised  credit  a  step  farther,  by  requesting  the 
notifying  bank  also  to  insert  in  its  letter  of  advice  a 
requirement  that  the  amount  of  drafts  negotiated  be 
indorsed  thereon.  A  further  precaution  sometimes 
employed  is  to  make  the  credit  available  only  upon  pre- 
sentation and  surrender  of  the  stipulated  documents  at 
the  office  of  the  notifying  bank.  The  beneficiary  in  this 
case  can,  if  the  credit  is  in  a  foreign  currency  and  he  is 
unwilling  to  accept  local  funds  at  the  rate  of  exchange 
quoted  by  the  notifying  bank,  request  a  foreign  currency 
check   which   he   can   sell   elsewhere.      The   adoption   of 


54  AMERICAN  COMMERCIAL  CREDITS 

this  plan,  in  addition  to  preventing  double  negotiation  of 
drafts,  answers  the  question  which  might  arise  in  connec- 
tion with  both  the  Danish  and  London  bank  cable  instruc- 
tions just  quoted,  as  to  whether  the  expiration  date 
indicated  referred  to  the  date  of  negotiation  in  the  United 
States  or  to  that  of  presentation  to  the  issuing  bank 
overseas. 

Australian  Credits 

It  throws  a  great  light  on  the  tenacity  of  fixed  habits, 
as  well  as  on  the  adaptability  of  the  commercial  credit 
device,  to  consider  how  foreign  banks  met  the  situation 
created  during  the  war  by  the  forced  transference  of 
a  large  volume  of  the  purchases  of  their  merchants  from 
London  to  New  York.  The  Australian  banks,  for  in- 
stance, clung,  where  they  could,  to  the  sterling  circular 
negotiation  credit  providing  for  the  acceptance  of  the 
beneficiary's  drafts  in  London,  which  they  had  formerly 
utilized  in  buying  from  England.  An  example  of  this 
type,  the  "Eastern  or  American  credit"  employed  by  an 
Australian  bank,  is  found  in  Figure  8.  It  is  the  classic 
circular  negotiation  type,  illustrated  by  Figure  i    (page 

31). 

Some  Australian  banks  assisted  the  beneficiary  in 
finding  an  American  bank  which  was  sufficiently 
acquainted  with  their  credit  standing  to  negotiate  the 
drafts  readily,  by  listing  at  the  bottom  of  the  instrument 
their  correspondents  in  the  United  States  and  terming 
them  the  banks'  agents  for  the  purposes  of  the  credit. 
These  correspondents,  in  case  they  negotiated  drafts, 
scarcely  stood  in  any  better  position  than  any  other  bank 
which  might  voluntarily  negotiate  them.  Their  relation- 
ship to  the  credit  is  illustrated  by  Figure  3  (page  33). 

Where  the  American  beneficiary  insisted  upon  a  dollar 


THE  ABSENCE  OF  A  STANDARD  PRACTICE         55 


Eastern  or  American  Credit 

Letter  of  Credit  No 0000 £ 3,500  . .  .Stg. 


THE  COMMERCIAL  BANK  OF  AUSTRALIA, 
LIMITED 

337-339  Collins  St.,  Melbourne 

Victoria,  Australia,  ....  16th  March,  IQ18  .... 

....  The  American  Export  Company  ....  of  ...  .  New 
York,  ....  being  desirous  of  drawing  upon  The  Commercial 
Bank  of  Australia,  Limited,  Bishopsgate,  corner  of  Leaden- 
hall  St.,  London,  at sight at  any  time  within  .... 

six  ....  months  from  this  date  for  full  invoice  value  of  ...  . 
steel  strip  ....  to  be  shipped  to  ....  Melbourne  and  I  or 
Sydney  ....  on  account  of  ...  .  Australian  Import  Company 
of  Melbourne,  Victoria,  ....  for  any  sum  not  exceeding  in  the 
whole  the  sum  of  ... .  Three  Thousand  Five  Hundred  Pounds 
Stg 

Now  The  Commercial  Bank  of  Australia,  Limited,  doth 
hereby  engage  with  the  Drawers,  Endorsers,  and  bona  fide 
holders  of  Bills  drawn  under  this  Credit  that  the  Bank  will  on 
production  to  them  of  a  Certificate  by  one  of  the  Agents  men- 
tioned in  the  attached  list  that  the  conditions  of  this  credit 
have  been  compHed  with  and  that  the  said  Agent  has  received 
from  the  Drawer  the  Invoices  and  Bills  of  Lading  to  order  and 
blank  endorsed  of  said  Goods  so  shipped  and  Policies  of  In- 
surance, including  war  risk,  thereon  to  a  suflficient  amount 
(covering  particular  average  if  required)  specifying  the  same 
and  that  the  said  Bills  are  drawn  on  account  of  the  said  .... 
Australian  Import  Company  ....  of  ...  .  Melbourne  .... 
under  this  Letter  of  Credit,  accept  such  Bills  on  presentation 
thereof  at  the  Office  of  the  Bank  in  London  and  honor  the 
same  at  maturity. 

The  Shipping  Documents  are  to  be  forwarded  to  this 
Bank  at  Melbourne  and  purchasers  of  Bills  under  this  Credit 
are  to  note  the  amount  of  said  Bills  on  the  back  hereof  and 
see  that  they  are  marked  "Drawn  under  Melbourne  Credit 
No 0000  ....  of  ...  .  i6th  March,  IQ18." 


,  Manager 

.  . ,  Accountant 


Figure  8.     Australian  Eastern  or  American  Sterling  Credit 


56  AMERICAN  COMMERCIAL  CREDITS 

credit,  the  Australian  practice  was  to  utilize  the  services 
of  an  American  correspondent  as  its  notifying  and  paying 
agent.  A  specimen  of  such  a  credit  is  found  in  Fig- 
ure 9.  This  credit  leaves  it  to  conjecture  whether  or 
not  it  is  to  be  regarded  as  being  irrevocably  valid  until 
the  expiration  date  indicated. 

Canadian  Credits 

The  situation  of  the  Canadian  merchants  and  banks 
was  similar  to  that  of  the  Australian.  The  specimen 
of  a  Canadian  bank  United  States  dollar  credit  given  in 
Figure  10  shows,  however,  a  somewhat  different  way 
of  meeting  it. 

Instead  of  using  the  New  York  accepting  bank  as 
the  notifying  agent,  as  the  Australian  bank  had  done  in 
its  dollar  credit,  the  Canadian  bank  issued  its  own  instru- 
ment in  duplicate.  The  original  was  mailed  to  the  bene- 
ficiary in  Spain  to  enable  him  to  negotiate  his  drafts  with 
a  local  Spanish  bank  on  the  strength  of  the  Canadian 
bank's  agreement  that  the  drafts  would  be  honored  on 
presentation  at  the  New  York  bank;  and  the  duplicate 
went  to  the  New  York  bank  to  serve  as  its  authority  to 
accept  and  pay  the  drafts  upon  presentation. 

The  standing  of  the  Canadian  bank  was  quite  sufficient 
to  make  the  credit  effective  without  any  bolstering  of 
the  arrangement  by  the  confirmation  of  the  New  York 
bank,  which  came  into  the  transaction  simply  because  the 
beneficiary  wanted  to  draw  drafts  in  United  States  dol- 
lars, both  because  United  States  dollars  were  more  readily 
salable  in  Spain  than  were  Canadian  dollars,  and  because 
the  existence  in  New  York  of  a  broad  discount  market 
for  bank  acceptances  made  its  proceeds  immediately  avail- 
a])le  to  the  negotiating  banker,  after  acceptance  by  the 
New  York  bank. 


THE  ABSENCE  OF  A  STANDARD  PRACTICE         57 


Credit  No oooo %.  . . .  14,000. 


THE  COMMERCIAL  BANK  OF  AUSTRALIA, 
LIMITED 


Melbourne,  ....  March  16,  igi8 


To  The  National  City  Bank  of  New  York, 
New  York  City 

You  are  hereby  authorized  to  pay  and  charge  to  our 
account  with  yourselves  if  presented  within  ....  six  months 
....  of  this  date  the  drafts  at  sight  of  ... .  The  American 
Export  Company  ....  of  ... .  New  York  ....  upon  ....  The 
Australian  Import  Company  \  . .  of  ....  Melbourne  ....  to 
the  extent  in  the  aggregate  of  ... .  Fourteen  Thousand  Dollars, 
United  States  currency 

Such  drafts  to  show  on  the  face  that  they  are  drawn  under 

Melbourne     Credit     No 0000  ....  of  ...  .  March     16, 

1918,  ....  and  to  be  accompanied  by  Invoices,  Bills  of  Lading, 
and  Policies  of  Insurance,  including  war  risk,  of  ... .  steel  strip 
....  shipped  to  ...  .  Melbourne  and/ or  Sydney  ....  on  ac- 
count   of The    Australian    Import    Company  .... 

consigned  to  The  Commercial  Bank  of  Australia,  Limited,  or 
to  shipper's  order  and  endorsed  in  blank. 

The  shipping  documents  are  to  be  forwarded  to  this  Bank 
at  ...  .  Melbourne  ....  and  the  amount  of  relative  drafts 
noted  on  the  back  hereof. 

,  Manager 

,  Accountant 


Figure  9.     American  Dollar  Credit  Opened  by  an 
Australian   Bank 


S8  AMERICAN  COMMERCIAL  CREDITS 

THE  DOMINION  BANK 
No.  . .  .0000.. . 

Toronto,. . . .  Jtdy  5,  iqiq  .... 
(Canada) 

To  The  National  City  Bank  of  New  York, 
New  York  City 

We  hereby  authorize  ....  The  Spanish  Export  Company 
....  of  ...  .  Malaga,  Spain,  ....  to  value  on  you  at  ...  . 
ninety  days'  date  ....  for  account  of  ...  .  The  Canadian 
Import  Company  ....  of  ...  .  Toronto  ....  for  any  sum  or 
sums  not  exceeding  in  all  ... .  One  Thousand  Dollars  .... 
to  be  used  as  they  may  direct  for  the  payment  of  the  Invoice 
value  of  ...  .  Raisins  ....  to  be  purchased  for  account  of  ...  . 
The  Canadian  Import  Company  ....  and  to  be  shipped  to 
Canada  or  any  Atlantic  Port  in  North  America. 

The  shipments  must  be  completed  and  the  drafts  drawn 
before  the  first  day  of  ...  .  November  ....  next  and  advice 
thereof  given  to  you  in  original  and  duplicate,  such  advice  to 
be  accompanied  by  Bill  of  Lading  filled  up  to  the  order  of  The 
Dominion  Bank  with  either  an  abstract  of  invoice  endorsed 
thereon  or  a  copy  of  invoice  attached  for  the  property  shipped 
as  above. 

All  the  Bills  of  Lading  issued  are  to  be  forwarded  direct  to 
you  except  the  one  sent  to  us  by  the  vessel  carrying  the  cargo 
and  the  one  retained  by  the  Captain  of  said  vessel. 

The  original  Invoice,  properly  certified,  is  to  be  forwarded 
to  The  Dominion  Bank. 

Insurance  ....  Marine  and  War  Risk  ....  to  be  effected 
here. 

Each  draft  drawn  under  this  Credit  must  bear  upon  its 
face  the  words  "Drawn  against  The  Dominion  Bank,  Toronto 
Branch,  Credit  No 0000,  ....  dated  ....  July  3, 1919. " 

We  hereby  agree  with  the  drawers,  endorsers,  and  bona 
fide  holders  of  Drafts  drawn  under  and  in  compliance  with  the 
terms  of  this  Credit  that  the  same  shall  be  duly  honored  on 
presentation  at  your  office  in  New  York. 

For        The  Dominion  Bank, 

,  Manager 

....  $1,000.00  ....  ,  Accountant 


Figure  10.     American  Dollar  Credit  Opened  by  a  Canadian 
Bank 


THE  ABSENCE  OF  A  STANDARD  PRACTICE         59 

Credits  from  Continental  Europe 

The  continental  banks,  like  those  of  the  United  States, 
had  apparently  leaned  heavily  on  the  services  of  their 
London  offices  and  correspondents  as  notifying,  confirm- 
ing, and  accepting  agents,  for  when  they  turned  from 
London  to  New  York  they  chose  to  issue  their  credits 
for  American  merchants  through  the  medium  of  New 
York  banks,  to  whom  they  cabled  or  wrote  their  instruc- 
tions.    The  specimen  shown  in  Figure  ii  is  typical. 

Far  Eastern  Credits 

To  understand  the  credits  which  came  to  our  mer- 
chants from  the  Far  East,  it  is  necessary  to  begin  with 
the  authority  to  purchase,  which  had  developed  there. 
A  typical  authority  to  purchase  reads  as  shown  in  Fig- 
ure  12. 

While  it  is  usually  stated  by  bankers  and  writers 
that  the  authority  to  purchase  must  not  be  regarded  as 
a  banker's  credit,  it  would  appear  to  fall  within  the 
classification  of  a  revocable  banker's  credit,  by  which 
the  buyer's  bank  authorizes  the  purchase  of  a  draft,  but 
a  credit  of  which  the  bank  which  is  authorized  to  make 
the  purchase,  and  not  the  shipper,  is  the  beneficiary. 
As  a  matter  of  actual  practice,  drafts  drawn  under 
authorities  to  purchase  are  usually  negotiated  by  the 
notifying  bank  for  the  account  of  the  buyer's  bank  by 
debiting  the  face  amount  of  the  draft,  plus  the  commis- 
sion, to  the  account  of  the  buyer's  bank.  The  notifying 
bank,  therefore,  occupies  a  neutral  position  before  drafts 
are  paid  and  drops  from  the  transaction  upon  payment. 
The  vital  distinction  between  the  Far  Eastern  authority 
to  purchase  and  any  other  credit  which  is  revocable  with- 
out notice  to  the  beneficiary  is  that  the  seller  does  not 
drop  out,  upon  being  paid,  but  continues  a  party  until  the 


6o  AMERICAN  COMMERCIAL  CREDITS 


DEN  DANSKE  LANDMANDSBANK 
Hypothek-  og  Vekselbank 
Aktieselskab 


Copenhagen  K.,  ....  February  i,  ig20  .... 
Credit  No oooo 


To  The  National  City  Bank  of  New  York, 
New  York  City 

Dear  Sirs: 

We  herewith  beg  to  open  with  you  the  following  .... 
confirmed  ....  credit  in  favor  of  ... .  The  American  Export 

Company 

for  account  of  ... .  The  Danish  Import  Company,  Copenhagen 

for    an    amount    of  ... .  about  .... 

$55,000.00 

available  by  ...  .  three  months^  draft 

against  delivery  of  the  following  documents: 

Bill  of  Lading,  issued  "to  order"  and  duly  endorsed  or 
issued   to  ....  buyers 

Policy  of  Insurance  ....  covering  Marine  and  War  Risk 


Invoice 

. ...  of  600  tons  Bessemer  rods  at  $g2  per  ton  of  1,016  kilos,  c.i.f. 
Middelfort Discount  and  Bill  Stamp  for  buyers  ac- 
count   

shipped   per from 

to 

Kindly  forward  documents  to  us.  This  credit  is  irrevo- 
cable until  ....  February  28,  IQ20,  ....  on  the  above 
conditions. 

Yours  respectfully, 

Den  Danske  Landmandsbank, 

Hypothek-  og  Vekselbank 

Aktieselskab 


Figure  11.     Instructions  Sent  to  New  York  Bank  by  European 
Bank  Opening  a  Dollar  Credit 


THE  ABSENCE  OF  A  STANDARD  PRACTICE         6i 


INTERNATIONAL  BANKING  CORPORATION 
60  Wall  Street,  New  York 


October  j,  IQ21 


American  Export  Company, 
New  York  City 

Dear  Sirs: 

We  beg  to  inform  you  that  we  have  been  authorized  by 
the  Manager  of  our  Branch  at  ... .  Shanghai  ....  to  nego- 
tiate your  bills  on  ... .  The  Chinese  Import  Company 

to  the  extent  of $1,000  {One  Thousand  Dollars) 

for  100%  invoice  cost  of   ....  cotton  sheetings 

shipped  to Shanghai 

The  bills  are  to  be  drawn  at  ...  .  ninety  days'  ....  sight 
and  must  be  accompanied  by  Full  Set  of  Bills  of  Lading; 
Invoices  and  Marine  Insurance  Policies,  all  in  Dupli- 
cate. 

Shipping  documents  must  be  made  out  to  "Order"  and 
blank  endorsed. 

The  above  documents  must  be  duly  hypothecated  to  the 
Bank  against  payment  of  the  bills. 

Please  note  that  this  advice  is  Not  to  be  considered  as 
being  a  "Bank  Credit"  and  does  not  relieve  you  from  the 
ordinary  liability  attaching  to  the  "Drawer"  of  a  Bill  of 
Exchange. 

All  drafts  under  this  Authority  to  Purchase  to  be  marked 
"Drawn Under Shanghai  ....  A.P.No 0000 " 

Kindly  hand  in  this  letter  with  your  drafts  in  order  that 
the  amoimt  of  same  may  be  endorsed  on  the  back  hereof. 

This  Authority  expires  on  ... .  January  i,  IQ22,  .... 
but  is  subject  to  cancellation  by  our  giving  you  notice  to  such 
effect. 

Yours  faithfully. 


Figure  12.     Typical  Authority  to  Purchase 


63  AMERICAN  COMMERCIAL  CREDITS 

ultimate  liquidation  of  the  draft  by  the  buyer,  by  reason 
of  the  fact  that  recourse  is  retained  against  the  seller  as 
drawer  of  the  draft  on  the  buyer. 

The  authority  to  purchase,  it  will  be  observed,  clearly 
states  this  fact.  The  issuance  of  the  authority  merely 
means  that  the  buyer's  bank  considers  that  all  bills  drawn 
will  be  duly  cared  for  and  that  it  will  do  all  in  its  power 
to  protect  the  interests  of  the  shipper.  It  indicates  that 
the  buyer  expressly  gives  the  shipper  authority  to  draw 
and  requests  his  bank  to  buy  the  bills  which  the  buyer 
agrees  to  accept.  It  is  to  be  taken  as  meaning  that  in 
the  opinion  of  the  buyer's  bank  the  buyer  will  carry  out 
the  terms  of  the  letter  of  guaranty  he  has  lodged  with  it, 
a  specimen  of  which  is  shown  in  Figure  13. 

The  general  use  of  the  authority  to  purchase  in  the 
Far  East  had  familiarized  Japanese  and  Philippine  Island 
bankers  and  merchants  with  a  credit  document  which 
provided  that  the  beneficiary's  drafts  were  to  be  drawn 
on  the  buyer  rather  than  on  the  issuing  or  paying  bank, 
as  was  the  case  elsewhere.  They  had  also  become  familiar 
with  the  usual  form  of  circular  negotiation  credit  of 
English  pattern  by  negotiating  their  merchants'  drafts 
drawn  thereunder.  By  incorporating  the  idea  of  a  draft 
on  the  buyer,  derived  from  the  authority  to  purchase, 
in  the  circular  negotiation  form,  they  achieved  a  truly 
puzzling  credit,  as  we  shall  later  see,  so  far  as  the  ques- 
tion of  recourse  on  the  beneficiary  as  drawer  of  these 
drafts  is  concerned.  These  credits  were  mailed  by  the 
issuing  Far  Eastern  banks  directly  to  the  American  bene- 
ficiaries. They  were  not  actually  negotiation  credits,  how- 
ever, even  though  they  merely  guaranteed  due  acceptance 
and  payment  at  maturity  by  the  drawee  of  drafts  drawn 
in  compliance  with  their  terms,  for  the  American  bank 
which  was  designated  as  the  negotiating  agent  was  author- 


AUTHORITY  TO  DRAW 

(Letter  of  Guaranty)  A.  P.  No oooo  .... 

Cabled  ....  10-1-21 .... 
October  i,  IQ21 
International  Banking  Corporation. 
Shanghai,  China 

Dear  Sir: 

We  beg  to  inform  you  that  we  have  authorized  ....  The 
American  Export  Company,  New  York,  ....  to  draw  on  us  with 
recourse  to  the  extent  of  ...  .  $1,000  at  ninety  days'  sight  .... 
for  100%  invoice  cost  against  the  following  documents: 

Bill  of  Lading  Invoice 

Insurance  Certificate  Consular  Invoice 

to  cover  shipment  of  ...  .  cotton  sheeting  ....  from  ....  New 
York  ....  to  ...  .  Shanghai 

Bill  of  Lading  to  order  of  International  Banking  Corpora- 
tion. Freight  to  be  prepaid;  Marine  Insurance  covered  by 
shipper. 

We  agree: 

1 .  To  accept  upon  presentation  all  bills  drawn  pursuant 

hereto. 

2.  To  hold  the  International  Banking  Corporation  harm- 

less because  of  any  damage  to  merchandise  shipped 
or  deficiency  or  defect  therein  or  in  the  documents 
above  described. 

3.  That  the  said  documents,  or  the  merchandise  covered 

thereby,  and  insurance  shall  be  held  as  collateral 
security  for  due  acceptance  and  payment  of  any 
drafts  drawn  hereunder,  with  power  to  the  pledgee 
to  sell  in  case  of  non-acceptance  or  non-payment 
of  the  draft  to  them  attached,  without  notice  at 
public  or  private  sale  and  after  deducting  all  ex- 
penses including  commissions  connected  therewith, 
the  net  proceeds  to  be  applied  toward  payment  of 
said  drafts.  The  receipt  by  you  of  other  collateral, 
merchandise  or  cash,  now  in  your  hands,  or  here- 
after deposited,  shall  not  alter  your  power  to  sell 
the  merchandise  pledged  and  the  proceeds  may  be 
applied  on  any  indebtedness  by  us  to  the  Bank  due 
or  to  become  due. 

4.  To  pay  your  commission  ot.  .,1/8% for  nego- 

tiating of  drafts  hereunder. 
This  engagement  to  commence  from  date  hereof  and  to 
apply  to  all  Bills  drawn  within  ....  three  . .  .  .months. 

Please  advise  by  ....  cable 

Yours  faithfully, 

Chinese  Import  Company 
The  above  is  our  A.  P.  No.  0000  Please  do  the  needful. 


Figure  13.     Buyer's  Letter  of  Guaranty  Issued  in  Connection  With 
an  Authority  to  Purchase 

63 


64  AMERICAN  COMMERCIAL  CREDITS 

ized  to  pay  the  beneficiary  the  full  amount  of  his  draft, 
without  discount,  and  immediately  charge  that  payment, 
plus  its  commission,  against  the  dollar  account  maintained 
by  the  Far  Eastern  bank  with  the  American  bank.  Such 
a  credit  is  shown  in  Figure  14. 

At  first  glance  this  credit  would  appear  to  fall  under 
the  typical  circular  negotiation  form,  which  is  exemplified 
by  the  Credit©  Italiano  credit  (Figure  7,  page  50),  and 
illustrated  by  Figures  i  (page  31),  and  3  (page  33).  It  is, 
however,  converted  to  the  straight  form,  and  though  not 
specially  advised,  is  rendered  available  only  at  one  bank,  by 
the  inclusion  of  the  provision  for  negotiations  without  dis- 
count by  the  New  York  correspondent.  It  is  therefore 
illustrated  by  Figure  2  (page  32). 

The  Far  Eastern  banks,  as  a  general  thing,  requested 
the  American  bank  which  was  to  act  as  paying  agent,  to 
confirm  to  the  beneficiary  by  a  separate  advice,  its  agree- 
ment to  pay  the  drafts  when  presented.  The  credit  then 
falls  under  Figure  4  (page  35). 

Our  Dollar  Import  Credits 

When  the  acceptance  privilege  was  accorded  to  our 
national  banks  in  19 14,  it  was  not  thought  that  there 
would  be  much  change  in  the  firmly  entrenched  habit 
of  our  foreign  sellers  in  demanding  sterling  credits,  and 
of  our  merchants  in  furnishing  them.  This  prediction 
took  no  account  of  the  effect  of  the  war  on  the  exchanges. 
Before  we  had  come  to  realize  it,  while  sterling  and  the 
other  continental  currencies  began,  in  irregular  fashion, 
that  downward  plunge  which  was  to  carry  them  to  hitherto 
undreamed  of  depths,  the  dollar  became  the  most  wanted 
and  the  most  stable  medium  of  exchange.  In  a  brief 
period  London  was  supplanted.  Ninety-five  per  cent  of 
our  import  credits  were  dollar  credits.     By  issuing  their 


THE  ABSENCE  OF  A  STANDARD  PRACTICE        65 


THE  DAI-ICHI  GINKO,  LIMITED 

Commercial  Letter  of  Credit 

L.  P.  No 000  ....         Tokyo,  ....  August  g,  1Q20  .... 

To  American  Export  Company, 
New  York  City 

Dear  Sirs: 

We  hereby  authorize  you  to  draw  draft  or  drafts  as 
follows:  Upon  ....  Japanese  Import  Company,  Tokyo,  .... 
at  a  usance  of  ...  .  ninety  days  ....  after  sight,  to  the  extent 
of  ... .  Three  Hundred  Forty  Dollars  only  ($340.00),  ....  for 
full  invoice  cost  of  ... .  $340.00;  ....  shipment  of  ... .  glass- 
ware ....  from  ....  New  York  ....  to  ... .  Tokyo,  ....  not 
later  than  ....  October  5,  ig20. 

Each  draft  must  be  accompanied  by  an  Invoice  in  dupli- 
cate and  the  full  set  of  Bills  of  Lading  made  out  to  order  and 
blank  endorsed. 

Insurance  Policy  to  accompany  the  draft. 

All  drafts  against  this   Credit  must  bear  the   clause 

"  Drawn  under  Letter  of  Credit  L.  P.  No 000,  ....  dated 

....  Tokyo,  August  g,  ig20,"  ....  and  the  amounts  of  such 
draft  or  drafts  negotiated  must  be  written  off  on  the  back 
hereof  and  this  Letter  is  to  be  returned  to  us  when  exhausted 
or   expired. 

We  hereby  guarantee  that  all  drafts  drawn  in  compliance 
with  the  terms  and  conditions  of  this  Credit  shall  be  duly 
accepted  and  paid  at  maturity  by  the  drawee. 

We  are, 

Yours  faithfully, 
For  The  Dai-Ichi  Ginko,  Limited 


Drafts  against  this  Credit  will 
be  negotiated  by  the  National 
City  Bank  of  New  York,  in 
New  York  City,  without 
discount. 


Figure  14.     Guaranteed  Authority  to  Purchase 


66  AMERICAN  COMMERCIAL  CREDITS 

own  instruments  and  accepting  their  own  drafts  our 
banks  saved  their  customers  the  commission  that  had 
previously  been  paid  to  London  bankers  for  this  service. 
There  was  an  additional  advantage  to  the  American 
importer.  As  his  obligation  was  now  to  settle  in  dollars, 
he  no  longer  needed  to  watch  the  sterling  exchange  rate. 
The  aggressiveness  of  the  larger  banks  in  establishing 
branches  and  agencies  abroad  and  in  soliciting  correspon- 
dent relationships  with  foreign  banks  soon  brought  them 
into  the  circle  of  international  bankers  whose  obligation 
would  be  freely  purchased  everywhere.  There  was  no 
departure,  therefore,  in  the  form  of  the  import  credit, 
except  that  it  was  issued  from  the  United  States  and 
made  payable  in  dollars.  A  typical  credit  of  this  char- 
acter, the  relationship  of  the  parties  to  which  is  shown 
in  Figure  i,  is  illustrated  by  Figure  15. 

Our  Dollar  Export  Credits 

The  great  new  task  to  which  the  world's  bankers 
were  put  was  that  of  establishing  dollar  credits  in  New 
York  to  pay  for  the  flood  of  goods  that  was  pouring  out 
of  our  borders.  Foreign  banks  bought  dollars  and  opened 
accounts  in  New  York  banks.  The  classic  negotiation 
form  of  credit  would  not  do  for  the  task  that  was  now 
to  be  performed.  The  obligation  of  the  credit  must  be, 
not  to  honor  sterling  drafts  in  London  or  franc  drafts 
in  Paris,  but  dollar  drafts  in  New  York.  The  obligations 
consequently  took  the  form  of  an  undertaking  that  drafts 
would  be  honored  upon  presentation  to  the  office  of  a 
New  York  correspondent.  It  was  possible,  theoretically, 
to  use  the  circular  form.  The  foreign  bank  could  mail 
its  instrument  to  the  beneficiary  in  the  United  States  and 
the  instrument  could  contain  the  familiar  undertaking 
that   the    New   York   correspondent   would   pay   drafts 


THE  ABSENCE  OF  A  STANDARD  PRACTICE         67 


THE  NATIONAL  CITY  BANK  OF  NEW  YORK 

Letter  of  Credit  No 00000  .... 

New  York,  ....  Dec.  ji,  igzi  .... 
A  rgentine  Export  Company, 
Buenos  Aires, 
Argentine 

Dear  Sirs: 

At  the  request  and  for  the  account  of  ... .  American  Im- 
port   Company  

of  New   York  we  hereby  authorize  you  to 

value  on 

The  National  City  Bank  of  New  York,  New  York  .... 
at ninety  days  sight  ....  for  any  sum  or  sums  not  ex- 
ceeding a  total  of One  Thousand  Dollars. ........... 

accompanied  by  commercial  invoice,  consular  invoice,  bills  of 
lading 


representing shipment  of wool 


insurance effected  here 

Bills  of  lading  for  such  shipment  must  be  drawn  to  the 
order  of  ... .  shipper,  blank  endorsed 

A  copy  of  the  invoice,  consular  invoice,  and  one  bill  of 
lading  must  be  sent  by  the  bank  negotiating  drafts,  direct 

to  ....  The  National  City  Bank  of  New  York attaching 

to  the  draft  a  statement  to  that  effect. 

The  amount  of  each  draft  n^otiated  must  be  endorsed 
hereon. 

We  hereby  agree  with  bona  fide  holders  that  all  drafts 
drawn  by  virtue  of  this  credit,  and  in  accordance  with  the 
above  stipulated  terms,  shall  meet  with  due  honor  upon  pre- 
sentation  at 

If   drawn   and    negotiated   on   or   before  ....  April  i, 

T922 

Respectfully  yours, 
The  National  City  Bank  of  New  York 
N.  B.   Drafts  drawn  under  this 
credit   must   bear  the   clause 
"Drawn  under  Letter  of  Credit 

No 00000  .... 

Dated  ....  Dec.  31, 1921  . . . . " 


Figure  15.     Dollar  Import  Credit 


68  AMERICAN  COMMERCIAL  CREDITS 

drawn  in  accordance  with  its  terms.  A  copy  of  this 
credit  could  be  sent  to  the  New  York  bank  and  constitute 
its  authority  to  honor  the  drafts  when  presented.  But  it 
was  simpler,  as  has  already  been  indicated,  for  a  foreign 
bank  to  inform  its  New  York  correspondent  by  mail  or 
cable  of  the  opening  of  the  credit  and  request  it  to  advise 
its  terms  to  the  beneficiary. 

The  Credit  Advice 

A  letter  written  by  the  New  York  bank  to  the  bene- 
ficiary would  suffice  for  an  advice.  As  the  volume  of 
this  business  developed,  however,  the  American  penchant 
for  standardization  came  into  play.  Forms  were  drawn, 
to  be  filled  in  and  serve  as  advices.  To  judge  from  the 
forms  produced,  they  were  devised  by  collecting  from 
any  convenient  source  as  many  types  of  credit  instru- 
ments as  could  be  found  and  borrowing  the  most  elegant 
phrase  from  each  one.  Most  banks  equipped  themselves 
with  two  forms — one  labeled  a  confirmed  credit  and  the 
other  an  unconfirmed  credit.  They  were  all  after  the 
general  pattern  of  those  illustrated  in  Figures  i6  and  17. 

With  such  forms  on  hand,  it  was  the  general  practice 
to  insert  the  details  of  the  credit  from  the  instructions 
which  were  received,  without  much  attempt  to  analyze 
the  precise  nature  of  the  instructions  other  than  to  ascer- 
tain whether  the  credit  was  to  be  confirmed  or  uncon- 
firmed. 

If  commercial  credit  practices  elsewhere  had  been 
uniform,  this  plan  would  have  simplified  the  operation. 
When  applied  to  the  differing  practices  of  our  new 
customers,  the  variety  of  which  has  been  here  but 
sketchily  outlined,  this  plan,  it  is  now  evident,  of  attempt- 
ing to  pour  myriad  instructions  into  a  common  mould, 
had  about  the  same  prospect  of  success  as  that  of  running 


THE  ABSENCE  OF  A  STANDARD  PRACTICE         69 


THE  NATIONAL  CITY  BANK 
OF  New  York 
New  York,  ....  December  31,  ig2i  .... 
American  Export  Company, 

New  York  City  When  referring  to  this 

credit,    please    mention 
our  No ... .  00000  .... 
Dear  Sirs: 

We  have  been  requested  to  open  a  credit  in  your  favor 
under  the  terms  and  conditions  stipulated  below: 

Opened  by  ... .  Buenos  Aires  Branch 

Account  ....  Argentine  Importing  Company 

Amount  ....  $1,000. — 

Available  by  draft  . ...  at  sight  on  us 

Covering cotton  goods 

Drafts  drawn  under  this  credit  must  be  presented  not  later 
than  ....  April  i,  IQ22 

Documents  required  ....  Full  set  ocean  bills  of  lading  to  order, 

blank  endorsed 

Marine  Insurance  Certificate 

Payment  will  be  facilitated  if  this  advice  accompanies 
your  documents  when  presented  at  our  Commercial  Credit 
Department.  If  transfer  is  requested  this  advice  must  be  sur- 
rendered for  cancellation. 

This  is  not  to  be  regarded  as  a  confirmed  credit,  or  an 
agreement  on  our  part,  and  is  therefore  subject  to  modification 
or  revocation  at  any  time. 

Please  note  that  we  can  accept  only  Bills  of  Lading  issued 
by  the  transportation  company  carrying  the  goods. 

Instructions  will  be  interpreted  in  accordance  with  the 
regulations  shown  on  the  reverse  side. 

Respectfully  yours, 

The  National  City  Bank  of  New  York 

If  impossible  to  comply  with  the  conditions  stated  above,  com- 
municate with  us  before  making  shipment.  The  conditions 
embodied  in  this  credit  must  be  adhered  to,  otherwise  pay- 
ment will  not  be  effected. 


Figure  16.     Confirmed  Dollar  Export  Credit 


70  AMERICAN  COMMERCIAL  CREDITS 

THE  NATIONAL  CITY  BANK 
OF  New  York 
New  York December  31,  1Q21 

American  Export  Company, 

New  York  City  When  referring  to  this 

credit,    please    mention 
our  No 00000  .... 

Dear  Sirs:. 

We  are  pleased  to  inform  you  that  we  have  been  requested 
to  open  a  credit  in  your  favor  under  the  terms  and  conditions 
stipulated  below 

Opened  by  ... .  Buenos  Aires  Branch 

Account  ....  Argentine  Importing  Company 

Amount $1,000. — 

Available  by  draft at  sight  on  us 

Covering  ....  cotton  goods 

Drafts  drawn  under  this  credit  must  be  presented  not  later 
than  ....  April  /,  IQ22 

Documents  required  ....  Full  set  ocean  bills  of  lading  to  order, 

blank  endorsed 

Marine  Insurance  Certificate 

This  is  to  be  regarded  as  a  confirmed  credit.  If  im- 
possible to  comply  with  the  conditions  stated  above,  communi- 
cate with  us  before  making  shipment.  The  conditions  em- 
bodied in  this  credit  must  be  adhered  to,  otherwise  payment 
will  not  be  effected.  Please  note  that  we  can  accept  only 
Bills  of  Lading  issued  by  the  transportation  company  carrying 
the  goods. 

Payment  will  be  facilitated  if  this  advice  accompanies 
your  documents  when  presented  at  our  Commercial  Credit 
Department.  If  transfer  is  requested  this  advice  must  be 
surrendered  for  cancellation. 

Respectfully  yours. 

The  National  City  Bank  of  New  York 

Figure  17.     Unconfirmed  Dollar  Export  Credit 


THE  ABSENCE  OF  A  STANDARD  PRACTICE         71 

automobile  parts  made  in  French,  British,  Italian,  and 
Belgian  factories  through  the  Ford  assembly  plant.  The 
prerequisite  of  success  in  providing  a  standardized  pro- 
duct is  a  standardized  supply.  The  weakness  of  the 
American  plan  of  operation  was  that  the  banks  were  not 
transmitting  to  the  beneficiary  in  many  cases  exactly  the 
sort  of  credit  they  were  requested  by  their  principals  to 
advise. 


CHAPTER  V 

THE  CONFUSION   CONCERNING 
CONFIRMATION 

The  Issue 

In  the  analysis  of  the  commercial  credit  practices  of 
other  countries,  which  have  had  our  consideration  in  the 
preceding  chapter,  we  found  in  the  various  methods 
employed  no  irreconcilable  differences  in  principle.  We 
(have  seen  that  most  of  the  confusion  which  has  resulted 
from  the  haphazard  development  of  commercial  credit 
practice  is  of  the  sort  which  is  the  usual  concomitant  of 
lack  of  standardization.  That  is  to  say,  while  each  com- 
munity might  profitably  abandon  some  feature  of  its 
practice  for  a  better  one  adopted  by  its  neighbor,  there 
is  no  fundamental  vice  in  the  commercial  credit  habits 
of  any  of  the  communities.  The  universal  adoption  of 
clearly  defined  practice,  no  matter  whose,  would  auto- 
matically end  the  confusion. 

The  situation  is,  to  continue  the  analogy  borrowed 
from  the  automotive  industry,  similar  to  that  in  which 
our  government  found  the  automobile  truck  business  at 
the  time  of  our  entry  into  the  war.  There  were  many 
truck  manufacturers  in  this  country,  the  product  of  any 
one  of  which  would  have  been  suitable  for  the  govern- 
ment's needs  with  little  or  no  refinements  beyond  those 
called  for  by  the  peculiar  necessities  of  war  service.  It 
was  not  any  fundamental  difference  between  makes  which 
led  the  government  to  seek  standardization,  but  the 
economy  resulting  from  carrying  supply  parts   for  one 

72 


CONFUSION  CONCERNING  CONFIRMATION         73 

design,  and  training  men  to  master,  not  a  score,  but  one 
mechanism.  In  the  main,  the  process  of  standardizing 
commercial  credit  practice  is  likewise  simply  one  of  refine- 
ment. 

The  search  after  definitions  and  the  effort  at  funda- 
mental analysis  of  commercial  credit  instruments  and 
functions  has,  however,  brought  to  light  an  appparently 
irreconcilable  difference  of  opinion  between  English  and 
American  bankers  concerning  a  basic  principle.  The 
issue  is  as  to  what  constitutes  a  confirmed  bankers* 
credit. 

The  English  View 

The  English  conception  of  a  confirmed  bankers'  credit 
is  set  forth  by  William  F.  Spalding,  an  English  writer 
and  lecturer  on  foreign  exchange,  in  his  recent  book, 
"Bankers'  Credits"  (London,  1921).  The  British  view- 
point can  best  be  stated  by  briefly  summarizing  Mr. 
Spalding's  definitions  of  terms  in  his  own  language.  He 
says  that  a  credit  "under  which  the  importer  himself 
accepts  and  pays  the  bills,  even  though  it  be  advised 
through  the  intermediary  of  a  banker,  is,  strictly  speak- 
ing, the  common  credit."  A  credit  under  which  the 
banker  "himself  guarantees  to  accept  or  pay  bills  is  the 
bankers'  credit"  (page  41).  "A  confirmed  bankers'  credit 
is  one  issued  by  a  bank  in  which  that  bank  undertakes, 
subject  to  the  fulfillment  of  certain  terms  and  conditions, 
to  accept  and  pay  at  maturity  the  bills  drawn  under  the 
authority  so  given.  It  is  the  banker  here  who  gives  the 
actual  authority,  not  the  importer"  (page  54).  He  says 
it  is  agreed  that  a  confirmed  bankers'  credit  cannot  be 
revoked,  but  that  about  the  right  to  cancel  a  bankers' 
credit  there  is  a  difference  of  opinion.  There  is  also, 
he  goes  on  to  say,  a  variation  of  the  bankers'  credit,  taking 


74  AMERICAN  COMMERCIAL  CREDITS 

"the  form  of  an  intimation  from  one  bank  to  another 
that  a  merchant  or  bank  has  opened  a  credit  with  them 
for  bills  to  be  drawn  under  terms,  and  this  intimation 
is  sometimes  accompanied  by  the  statement  that  the 
credit  is  an  'unconfirmed  credit/  that  is,  it  is  merely  an 
advice ;  consequently  the  right  of  cancellation  is  reserved. 
However,  even  in  an  unconfirmed  credit,  the  exporter 
does  not  draw  his  bills  on  the  importer,  but  on  a  bank, 
although  the  bank  does  not  guarantee  or  confirm  in 
advance  that  it  will  give  its  acceptance  to  the  bills."  He 
adds :  "Needless  to  say,  there  is  considerable  controversy 
about  the  precise  reliance  to  be  placed  on  an  unconfirmed 
credit,  and  bankers  hold  that  the  value  of  such  a  credit 
is  that  it  is  valid  until  cancelled;  but  the  bank  has  the 
right  to  cancel  it  whether  the  beneficiary  agrees  or  not" 
(page  45).  There  is,  he  further  observes,  a  dispute  as 
to  whether  notice  of  cancellation  must  reach  the  advising 
bank  prior  to  negotiation  of  drafts  to  become  effective, 
or  whether  the  "intimating"  bank  can  give  effective  notice 
of  cancellation  upon  presentation  to  it,  in  London,  of 
negotiated  drafts   (page  46). 

The  American  View  of  the  Credits 

The  American  view  is  that  an  arrangement  under 
which  the  importer  himself  accepts  and  pays  the  drafts, 
but  which  is  advised  through  the  intermediary  of  a 
banker,  is,  if  the  banker  authorizes  the  purchase  of  the 
drafts,  an  authority  to  purchase.  A  credit  under  which 
the  banker  himself  guarantees  to  accept  or  pay  bills  is 
a  bankers'  credit.  A  credit  advised  by  a  notifying  bank 
under  instructions  from  the  opening  bank,  in  which  the 
notifying  bank  confirms  the  undertaking  of  the  opening 
bank  to  accept  and  pay  at  maturity  the  bills  drawn  under 
the  authority  so  given,  is  a  confirmed  bankers'  credit. 


CONFUSION  CONCERNING  CONFIRMATION         75 

It  is  agreed  among  American  bankers  that  neither  an 
irrevocable  bankers'  credit  nor  a  confirmed  bankers'  credit 
can  be  revoked  without  the  consent  of  the  beneficiary. 
An  unconfirmed  credit,  in  the  American  view,  is  a  credit 
advised  by  a  notifying  bank  to  the  beneficiary,  without 
obligation  on  the  part  of  the  notifying  bank.  To  the 
English  variation  of  "unconfirmed"  bankers'  credit,  taking 
"the  form  of  an  intimation  from  one  bank  to  another 
that  a  merchant  or  bank  has  opened  a  credit  with  them 
for  bills  to  be  drawn  under  terms,"  with  its  interesting 
doubts  as  to  whether  it  can  be  canceled,  and  if  so,  where 
and  how,  the  American  banker  has  given  the  reception 
it  deserves,  by  ignoring  it. 

The  English  Statement  of  the  American  View 

Mr.  Spalding  says  (page  62),  "The  American  view 
is  that  a  confirmed  credit,  also  called  an  irrevocable 
credit,  is  one  that  cannot  be  canceled  without  consent  of 
the  buyer  and  seller;  and  when  the  American  bank  has 
notified  the  seller  that  such  a  credit  is  established  in  his 
favor,  it  is  held  responsible  for  payment  if  the  terms  of 
the  credit  are  properly  carried  out."  If  Mr.  Spalding 
is  referring  to  a  credit  in  which  the  American  bank  is 
not  the  opening  bank  but  the  confirming  bank,  the  state- 
ment is  correct,  except  for  the  implication  that  the  terms 
"confirmed"  and  "irrevocable"  are  used  synonymously  in 
this  country.  In  the  American  view,  a  confirmed  credit 
must  of  necessity  be  irrevocable  on  the  part  of  the  open- 
ing bank,  in  order  to  make  the  confirmation  by  the  notify- 
ing bank  the  effective  protection  the  beneficiary  seeks. 
But  the  terms  are  in  no  sense  used  synonymously.  Not 
only  does  the  American  view  recognize  the  existence  of, 
but,  as  we  shall  later  see,  American  bankers  provide,  a 
form  of  credit  which  is  irrevocable  but  unconfirmed. 


70  AMERICAN  COMMERCIAL  CREDITS 

Is  "Confirmed"  Synonymous  with  "Advised"? 

The  word  "confirm"  is  derived  from  the  Latin,  con 
plus  firmare,  to  make  firm.  Its  dictionary  definition  is 
"to  make  firm  or  firmer ;  to  add  strength  to ;  to  corrobor- 
ate." Confirmation  is  defined  as  "a  strengthening,  ratify- 
ing or  sanctioning;  that  which  gives  new  strength  to." 
It  therefore  connotes  an  addition  to  something  already 
in  existence — additional  security  given  to  an  obligation 
already  in  force.  The  British  usage  seems  to  be  an 
attempt  to  give  the  word  "confirm"  three  distinct  mean- 
ings, only  one  of  which  is  justified  by  its  derivation  or 
normal  use. 

First,  it  is  used  by  some  British  bankers — so  Mr. 
Spalding  says,  and  he  admits  that  it  indicates  a  "con- 
fusion in  ideas" — as  a  synonym  for  "advise."  Yet  he 
lapses  into  the  same  error  when  he  refers  to  a  "mere 
confirmation  or  advising"  of  a  credit  through  one  or 
more  banks  or  bank  offices  (page  56).  He  quite  properly 
continues  that  the  mere  passage  from  one  bank  to  another 
of  authority  to  negotiate  bills  "does  not  make  the  credit 
a  confirmed  bankers'  credit,  otherwise  it  would  be  possible 
to  apply  the  term  to  practically  every  form  of  credit  which 
is  issued  and  advised  through  the  intermediary  of  a  bank." 
If  he  clung  fast  to  this  idea  he  would  be  on  safe  ground. 
Yet  he  writes  also  of  "an  'unconfirmed  credit,'  that  is, 
merely  an  advice,"  or  "intimation  from  one  bank  to  an- 
other" (page  45).  He  carries  the  word  "advised"  to 
the  other  extreme,  and  displays  some  doubt  as  to  whether 
an  unconfirmed  credit  is,  even  between  bank  and  bank, 
an  authority  to  negotiate  bills. 

How  much  simpler,  and  how  much  more  correct, 
to  recognize  the  fact  that  "advised"  is  not  synonymous 
with  either  "confirmed"  or  "unconfirmed" !  To  advise 
is  to  notify,  and  the   notification  can  be  of   either   an 


CONFUSION  CONCERNING  CONFIRMATION         77 

unconfirmed   or   a   confirmed   credit,   as   we   shall    later 
see. 

Is  "Confirmed"  Synonymous  with  "Irrevocable"? 

According  to  Mr.  Spalding,  the  addition  of  the  word 
"confirmed"  to  "bankers'  credit"  creates  a  "confirmed 
bankers'  credit,"  in  which  the  issuing  bank  undertakes 
to  accept  and  pay  at  maturity  the  bills  drawn  under  the 
authority  so  given.  "There  is  no  uncertainty,"  he  con- 
tinues, "about  the  confirmed  bankers'  credit,  which  it  is 
held,  once  issued  to  the  grantee,  cannot  be  revoked  by  the 
banker"  (page  54).  Here  he  uses  the  word  "confirm" 
in  a  second  and  an  entirely  new  sense.  A  "confirmed" 
credit  is  an  "irrevocable"  credit. 

As  Mr.  Spalding  "remembers  hearing  confirmed 
bankers'  credits  defined"  in  a  manner  contrary  to  his 
first  use  of  the  word,  "by  a  banker  in  one  of  the  Law 
Courts,"  there  is  reason  to  believe  that  "confirm"  and 
"advise"  are  not  generally  given  a  synonymous  use,  even 
in  England.  There  is  no  doubt,  however,  that  "confirmed" 
and  "irrevocable"  are  there  regarded  as  interchangeable 
terms.  One  of  the  London  banks,  for  instance,  gave  its 
New  York  correspondent  the  following  instructions: 

We  request  you  to  establish  a  Credit  with  your  goodselves 
to  the  extent  of  £2,000. —  (two  thousand  pounds  sterling),  authoriz- 
ing the  negotiation  of  the  draft  or  drafts,  without  recourse  on 

drawers  of ,  (address) ,  drawn 

on  this  bank  at  sight,  payable  in  London. 

The  drafts  are  to  be  secured  by  the  due  endorsement  and 
delivery  as  Collateral  Security  of  full  set  of  clean  blank  endorsed 
bills  of  lading  for  3000  dozen  hose  and  half  hose. 

The  insurance,  marine  and  war,  with  15  per  cent,  added,  is  to 
be  effected  by  shippers  and  the  policy  must  be  attached  to  the 
drafts. 

Kindly  note  that  this  credit  is  opened  on  behalf  of  our  clients, 


78  AMERICAN  COMMERCIAL  CREDITS 

,  ,  and  unless  previously  can- 
celled it  is  to  be  available  until  23rd  of  July,  1920. 

Drafts  drawn  under  this  credit  to  contain  the  clause  "Drawn 
under  credit  No.  3164  of  Barclays  Bank,  Ltd.,  dated  London  30th 
January,  1920." 

We  undertake  that  all  drafts  negotiated  under  the  terms  of 
this  credit  will  meet  with  due  honor  on  presentation,  provided 
they  are  marked  as  being  so  drawn. 

Answering  a  query  as  to  what  steps  must  be  taken 
to  render  the  cancellation  effective,  this  bank  explains  to 
its  American  correspondent,  which  had  advised  the  bene- 
ficiary of  the  existence  of  the  credit  without  obligation 
on  its  part,  as  follows: 

Such  cancellation  would  become  operative  as  soon  as  instruc- 
tions are  received  by  you  from  us  to  this  effect,  provided  no  drafts 
had  been  negotiated  by  you,  and  there  is  no  obligation  to  obtain 
the  beneficiaries'  agreement.  The  advice  which  you  have  issued 
to  the  beneficiaries  is  therefore  quite  in  accordance  with  our 
instructions. 

The  last  paragraph  of  our  letter  is,  of  course,  an  undertaking 
to  your  goodselves  that  all  drafts  negotiated  in  accordance  with 
the  terms  of  the  credit  will  be  duly  honored  by  us  on  presentation, 
but  this  undertaking  does  not  convey  any  guarantee  on  our  part 
to  the  beneficiary,  and  merely  covers  any  drafts  actually  nego- 
tiated prior  to  the  receipt  by  you  of  any  instructions  to  cancel  the 
credit. 

The  British  bank  terms  this  an  "unconfirmed"  credit. 
Suppose  the  British  bank  were  to  eliminate  the  right  to 
revoke  during  the  stipulated  life  of  this  credit.  It  would 
thus  convert  it  into  an  irrevocable  credit;  but  the  British 
bank  would  term  it  a  "confirmed"  credit.  Yet  no  lawyer 
could  then  read  into  it  any  more  guaranty  on  the  part 
of  the  British  bank  to  the  beneficiary  than  previously. 
A  resort  to  the  graphic  method  of  illustration  may  empha- 


CONFUSION  CONCERNING  CONFIRMATION         79 

size  this  fact.  This  British  credit,  in  the  unconfirmed 
form,  represents  a  habihty  to  the  correspondent  in  connec- 
tion with  any  draft  negotiated  prior  to  receipt  by  the 
correspondent  of  notice  of  cancellation,  but  no  liability  of 
any  character  to  the  beneficiary.  This  state  of  affairs  is 
like  that  which  exists  in  the  case  of  a  reimbursement  credit, 
illustrated  by  Figure  5  (page  42). 

To  convert  it  into  what  the  British  bank  terms  a 
"confirmed"  credit,  the  British  bank  would  waive  the 
right  to  revoke.  This  action  on  its  part  would,  how- 
ever, simply  terminate  its  right  to  extinguish  its  existing 
liability,  and  would  not  add  or  subtract  anything  from 
the  liability.  The  graph  would  remain  unchanged.  The 
way  for  the  British  bank  to  engage  itself  to  the  beneficiary 
would  be  to  include  him  in  its  undertaking,  but  that  could 
have  no  further  effect  than  to  entitle  him  to  notice  of 
cancellation,  if  the  stipulation  for  cancellation  remained. 
By  including  the  beneficiary  in  its  undertaking  to  honor 
drafts  negotiated  prior  to  receipt  of  notice  of  cancella- 
tion, the  credit  would,  until  revoked,  fall  within  the  nego- 
tiation form  illustrated  by  Figure  3  (page  33). 

If,  on  the  other  hand,  the  British  bank  made  the 
credit  irrevocable,  and  asked  its  American  correspondent 
to  state  to  the  beneficiary  that  it  also  undertook  that 
drafts  negotiated  within  its  stipulated  life  would  be  hon- 
ored on  presentation  in  London,  it  would  be  converted 
into  a  confirmed  credit  in  the  American  sense.  Such  a 
credit  has  already  been  illustrated  by  Figure  4  (page  35). 

If  we  confine  the  term  "irrevocable"  to  a  credit  in 
which  the  right  of  cancellation  is  waived,  and  the  term 
"confirmed"  to  a  credit  in  which  one  bank  adds  its 
obligation  to  that  of  another,  the  language  used  will 
illuminate,  instead  of  obscure,  the  difference  between  two 
allied  but  separate  principles. 


80  AMERICAN  COMMERCIAL  CREDITS 

The  Right  Use  of  the  Word 

The  odd  part  of  the  matter  is  that  the  English  banker 
also  uses  the  term  "confirmed"  in  this  third  sense,  to 
apply  to  a  credit  opened  by  a  London  bank  with  a  joint 
undertaking  by  the  London  and  New  York  banks  that 
the  drafts  will  be  honored  on  presentation  at  the  New 
York  bank.  For  example,  a  London  bank  in  instructing 
its  New  York  correspondent  to  advise  an  American  bene- 
ficiary that  it  has  itself  opened  a  confirmed  credit  in  his 
favor,  adds  that  it  does  or  does  not  wish  the  New  York 
correspondent  to  confirm  it  for  the  London  bank's  account. 
It  is  only  in  this  latter  sense  that  the  British  bank  uses 
the  term  in  the  fashion  which  is  justified  by  its  diction- 
ary definition;  and  it  is  only  in  this  latter  sense  that  the 
term  is  employed  by  American  bankers. 

The  American  use  of  the  word  "confirm,"  and  also 
the  English  usage  last  noted,  give  it  the  natural  meaning 
to  which  it  is  entitled  as  a  verb  in  good  standing  in  the 
English  language,  i.e.,  as  meaning  to  strengthen,  ratify, 
or  sanction.  When  an  American  bank  confirms  a  credit 
it  does  what  the  word  implies — adds  its  obligation  to 
the  obligation  of  a  foreign  bank,  for  the  further  protec- 
tion and  assurance  of  the  beneficiary.  That  is  what  the 
American  merchant  expects  the  American  bank  to  do. 
An  American  beneficiary  in  asking  for  a  confirmed  credit 
is  seeking  the  obligation  of  an  American  bank  near  at 
hand,  in  addition  to  that  of  an  overseas  bank. 

How  the  Credit  Obligation  Arises 

Before  we  can  attempt  to  pass  judgment  on  these 
views,  we  must  come  to  an  understanding  of  the  way 
in  which  the  obligation  to  pay  drafts,  which  is  at  the 
basis  of  commercial  credits,  arises.  It  was  a  principle 
of  English  commercial  law  established  by  Lord  Mansfield 


CONFUSION  CONCERNING  CONFIRMATION         8i 

that  a  written  promise  to  accept  a  future  bill,  or  one  not 
in  existence,  was  binding  if  the  bill  were  taken  by  the 
holder  upon  the  faith  and  credit  of  such  promise.^  This 
principle  has  been  given  effect  in  the  Uniform  Negotiable 
Instruments  Law,  which  is  in  effect  in  most  of  the  states 
and  territories  of  the  United  States.  Section  223  of 
the  New  York  Act  reads: 

An  unconditional  promise  in  writing  to  accept  a  bill  before 
it  is  drawn  is  deemed  an  actual  acceptance  in  favor  of  every  person 
who,  upon  the  faith  thereof,  receives  the  bill  for  value. 

In  the  typical  negotiation  credit  we  find  this  phrase: 
"We  hereby  agree  with  the  drawers,  endorsers  and  bona 
fide  holders  of  drafts  drawn  under  and  in  compliance  with 
the  terms  of  this  credit  that  the  same  shall  be  duly 
honored  on  presentation."  This  is  apparently  "an  uncon- 
ditional promise  in  writing  to  accept"  of  the  sort  con- 
templated by  the  act.  In  this  event,  though  a  draft  be 
refused  acceptance,  a  bona  fide  holder  could  sue  the 
drawee  as  on  an  accepted  draft,  utilizing  the  credit 
instrument  as  evidence  of  the  undertaking  to  accept. 

This  theory,  however,  appears  to  provide  no  satis- 
factory basis  on  which  to  argue  for  the  irrevocability  of 
the  credit,  in  advance  of  the  negotiation  of  the  drafts  in 
question  on  the  faith  of  the  agreement  to  accept.  A  more 
satisfactory  theory,  and  the  one  which  appears  to  be 
worthy  of  and  gaining  the  most  support  of  all  the  theories 
which  have  been  advanced  as  to  the  contract  rights  created 
by  a  letter  of  credit,  is  the  doctrine  that  it  constitutes  a 
mere  contractual  obligation  from  the  opening  bank  to 
the  beneficiary,  supported  by  a  consideration  in  the  form 
of  the  commission  paid  to  the  opening  bank  by  the  pur- 
chaser of  the  goods.     (See  Chapter  XVII.) 


See  Bank  of  Michigan  v.  Ely,  17  Wendell  (N.  Y.)  508. 
6 


82  AMERICAN  COMMERCIAL  CREDITS 

The  Obligor  of  a  Circular  Credit 

The  value  of  any  commercial  letter  of  credit  to  the 
beneficiary  results,  therefore,  from  whatever  contractual 
undertaking  is  made  with  him  by  some  party  to  it.  Take 
the  case  of  the  stereotyped  form  of  circular  negotiation 
credit,  for  example.  If  the  instrument  is  issued  by  the 
opening  bank  directly  to  the  beneficiary,  obviously  only 
the  bank  issuing  the  instrument  is  bound. 

Let  us  now  consider  the  case  in  which  a  foreign  bank 
sends  its  credit  instrument  to  the  beneficiary,  in  terms 
by  which  it  undertakes  that  its  New  York  correspondent 
will  honor  drafts  drawn  in  accordance  with  its  terms. 
The  Dominion  Bank  of  Canada  credit,  shown  in  Figure 
10  (page  58),  is  an  excellent  illustration  of  this  type. 
Can  such  a  credit,  even  if  it  is  irrevocable,  be  held  to  be 
the  legal  obligation  of  the  New  York  correspondent? 
Obviously  it  cannot  be,  unless  the  New  York  bank  sep- 
arately undertakes,  in  writing,  to  honor  the  beneficiary's 
draft. 

However  such  a  credit  may  be  regarded  in  England 
(Mr.  Spalding  is  silent  on  this  point,  which  is  the  crux 
of  the  whole  discussion  about  the  meaning  of  "confirma- 
tion"), our  merchants  do  not  regard  a  credit  as  con- 
firmed,  even  though  it  be  the  irrevocable  obligation  of 
the  issuing  bank,  unless  the  American  bank  which  is  to 
honor  the  drafts  confirms  that  it  will  honor  them. 

No  Basic  Difference  in  English  and  American  Practices 
The  present  confusing  use  of  the  term  "confirmed" 
by  the  British  undoubtedly  results  from  the  historical 
development  of  the  business.  In  the  days  when  by  reason 
of  the  popularity  of  sterling  and  their  own  world-wide 
reputation,  the  London  banks  were  called  upon  to  accept 
drafts  drawn  against  commercial  credits  originating  with 


CONFUSION  CONCERNING  CONFIRMATION         83 

banks,  both  English  and  foreign,  of  only  local  reputation, 
the  beneficiary  and  the  negotiating  bank  were  not  inter- 
ested in  having  any  obligation  but  that  of  the  London 
banker.  It  was  the  undertaking  by  the  London  tank, 
which  was  really  a  secondary  obligation,  that  actually 
operated  to  induce  negotiation.  It  would  have  been  idle 
for  local  banks  to  have  adopted  the  course  which  Aus- 
tralian and  Canadian  banks  can  now  employ,  as  evidenced 
by  Figure  8  (page  55)  and  Figure  10  (page  58),  of 
mailing  the  credit  to  the  beneficiary  and  assuring  him 
that  the  correspondent  on  whom  the  drafts  were  to  be 
drawn  would  honor  them.  It  would  not  have  made  their 
own  credit  any  more  effective  to  have  mailed  it  to  the 
beneficiary,  as  the  Japanese  banks  do,  as  evidenced  by 
Figure  14  (page  65),  to  have  requested  the  bank  upon 
which  the  drafts  were  to  be  drawn  to  confirm  by  a 
separate  advice  that  they  would  be  accepted  on  presenta- 
tion. It  was  the  confirmation  of  the  arrangement  by  the 
banker  who  was  to  accept  which  alone  made  London 
credits  effective  in  those  days,  in  the  eyes  of  negotiating 
banks  and  beneficiaries.  Therefore,  though  the  London 
bank  simply  confirmed  the  credit  of  some  less  well-known 
bank,  the  fact  that  it  was  the  confirmation  of  the  obliga- 
tion of  another  bank  dropped  into  the  background.  In 
some  instances,  and  particularly  in  the  case  of  credits 
issued,  like  that  of  the  Credito  Italiano  in  Figure  7  (page 
50),  by  a  London  branch  for  account  of  some  other  office, 
the  identity  of  the  local  bank  or  branch  for  whose  account 
the  operation  was  undertaken  was  even  permitted  entirely 
to  disappear. 

There  is  no  reason,  even  today,  from  the  British 
point  of  view,  why  the  obligation  of  a  British  bank, 
whether  in  sterling  or  dollars,  needs  bolstering  up  by 
the  addition  of  the  obligation  of  an  American  bank.    That 


84  AMERICAN  COMMERCIAL  CREDITS 

is  sound  reasoning.  It  is  nevertheless  a  violation  of  the 
old  English  practice,  and  of  the  English  language,  to 
term  a  London  bank  credit,  which  undertakes  irrevocably 
that  drafts  will  be  honored  at  the  banking  house  of  its 
American  correspondent,  a  "confirmed"  credit,  unless  the 
American  correspondent  confirms  that  the  drafts  will  be 
honored,  just  as  the  English  bank  did  for  American 
banks  in  the  old  sterling  credits.  It  is  an  irrevocable, 
uncancelable  credit,  as  sound  as  the  British  bank.  It  is 
in  form  similar  to  the  confirmed  credit  that  the  London 
banks  formerly  issued  for  the  American  banks.  But  it 
is  not  a  confirmed  credit,  because  it  lacks  the  confirma- 
tion of  the  drawee.  The  old  credits  were  termed  "con- 
firmed" because  the  proposed  drawee  undertook  to  accept. 
The  credit  just  outlined  is  not  confirmed,  because  the  con- 
firmation or  undertaking  of  the  proposed  drawee  is  lacking. 
The  bankers'  credit  which  Mr.  Spalding  has  chosen 
for  his  illustration  is  a  true  confirmed  credit.  He  uses 
as  his  example  a  credit  opened  for  a  London  importer 
by  his  bank,  which  he  terms  the  "city"  bank.  The  city 
bank  in  turn  asks  the  London  branch  of  the  Indian  bank 
to  advise  out  the  credit.  The  language  of  the  advice 
given  by  the  bank  in  India  to  the  beneficiary  is  that  it 
is  "instructed  to  negotiate  his  bills."  This  is  by  its  term 
something  more  than  an  advice — in  fact  Mr.  Spalding 
distinguishes  it  from  an  unconfirmed  credit  by  stating 
that  the  latter  is  merely  an  advice.  It  seems  a  fair 
statement,  therefore,  to  say  that  the  principle  of  con- 
firmation is  carefully  adhered  to  in  British  practice,  and 
that  the  misunderstanding  is  simply  one  of  nomenclature. 

The  Continental  Use  of  the  Terms 

The  continental  banks,  like  the  English  banks,  refer 
to  "confirm"  and  "irrevocable"  as  synonymous  terms,  but 


CONFUSION  CONCERNING  CONFIRMATION         8$ 

they,  too,  are  careful  to  preserve  the  distinction  in  prac- 
tice. Moreover,  they  are  entirely  in  agreement  with  the 
American  idea  that  a  notifying  bank,  if  asked  to  advise 
a  confirmed  credit,  is  expected  to  lend  its  credit  also  to 
the  beneficiary.  On  this  point  a  prominent  Dutch  bank 
has  this  to  say : 

We  always  advise  the  beneficiaries  of  the  opening  of  docu- 
mentary credits.  In  case  you  wish  us  to  "confirm"  them  to  the 
beneficiaries  we  shall  be  pleased  to  receive  your  special  instruc- 
tions to  that  effect,  together  with  your  statement  for  what  period 
the  credit  will  be  irrevocably  valid.  It  should  be  added  that  in 
this  case  the  credit  can  only  be  altered  or  revoked  if  approved 
by  the  beneficiary,  and  that  an  extra  commission  will  be  charged 
for  confirming  such  credits,  according  to  a  decision  of  the  Bankers 
Association.  If  we  are  without  your  instructions  to  open  a 
credit  irrevocably  we  shall  advise  the  beneficiaries  without  any 
liabiHty  on  our  part. 

A  similar  idea  is  expressed  by  a  leading  Danish 
institution : 

In  order  to  avoid  misunderstandings  we  beg  to  call  your  at- 
tention to  the  following  differences  between  unconfirmed  and 
confirmed  (irrevocable)  credits,  and  we  urgently  request  you 
kindly  to  give  us  exact  orders  in  that  respect : 

1.  Unconfirmed  credits  will  ordinarily,  when  the  beneficiary  is 
domiciled  in  Denmark  and  his  address  is  known  to  us,  be  advised 
without  obligation,  either  per  telephone  or  by  letter,  although 
we  do  not  acknowledge  that  we  are  compelled  to  do  so;  such 
credits  may  be  cancelled  at  any  time. 

2.  Confirmed  credits  (i.e.,  irrevocable)  on  the  contrary  will 
be  advised  the  beneficiary  in  binding  form,  so  that  cancellation  or 
alteration  of  the  original  stipulations  of  the  credit  before  expira- 
tion of  the  validity,  which  must  always  be  given,  cannot  take 
place  without  the  consent  of  the  beneficiary. 

A  French  bank  says: 

In  France  it  is  customary,  when  a  correspondent  advises  us  of 
the  issue  of  a  documentary  Letter  of  Credit,  to  consider  it  as  a 


86  AMERICAN  COMMERCIAL  CREDITS 

Confirmed  Credit,  that  is  to  say,  Irrevocable,  which  cannot  be 
canceled,  except  by  agreement  between  the  purchaser  and  the 
seller. 

With  regard  to  Unconfirmed  Credits,  that  is  to  say  Revocable 
Credits,  these  may  be  canceled  directly  by  the  person  who  gives 
the  order.  In  the  first  case,  as  the  liability  of  the  bank  is  greater, 
we  charge  a  commission  described  as  being  for  ''confirmation"  in 
addition  to  the  documentary  commission. 

The  German  practice  is  in  accord  with  that  of  its 
neighbors. 

This  universal  continental  practice  for  a  confirming 
bank  to  charge  an  extra  commission  for  the  risk  assumed 
in  lending  its  credit  to  the  beneficiary  for  account  of  an 
opening  bank  is  not  in  general  use  in  England.  It  is 
growing  here,  and  is  likely  to  come  into  general  employ- 
ment in  this  country. 

The  Conflict  Is  Merely  in  Nomenclature 

In  all  the  discussion  concerning  the  meaning  of  con- 
firmation there  is  no  casus  belli.  The  only  violence  that 
is  done  is  to  the  dictionary.  However,  to  clarify  the 
basic  agreement  in  principle  it  will  be  necessary  to  adopt 
a  common  nomenclature.  The  restricted  meaning  given 
to  the  term  "confirmed"  in  the  United  States  appears  to 
coincide  more  closely  with  a  sound  theory  of  commercial 
letters  of  credit,  and  should  presently  result  in  the  term 
being  similarly  used  elsewhere. 


/  ^LXXi- 


CHAPTER  VI 

THE  CONSEQUENCES  OF  HAPHAZARD 
GROWTH 

Effect  of  Declining  Exchanges 

Some  foreign  credit  practices  were  potential  with 
disaster  before  we  adopted  them.  Other  dangerous  prac- 
tices resulted  from  the  haphazard  development  of  the 
commercial  credit  business  in  this  country  under  the 
hurried  pressure  of  war  conditions.  The  possibilities  of 
disaster  did  not,  however,  immediately  manifest  them- 
selves. So  long  as  the  war  and  the  postwar  period  of 
inflation  kept  prices  on  the  ascendant,  buyers  had  no 
thought  of  seeking  pretexts  on  which  to  base  the  can- 
cellation of  their  contracts.  In  19 19,  however,  even 
while  merchandise  values  were  still  firm  here,  foreign 
buyers  were  finding  their  purchases  unprofitable.  During 
the  war  the  pound  sterling  had  been  "pegged,"  and  the 
French  franc  and  the  Italian  lire  supported  to  a  lesser 
degree,  through  purchases  by  the  governments  concerned 
of  any  excess  oflFerings  which  might  otherwise  have 
depressed  the  market.  With  the  withdrawal  of  this 
support  these  exchanges  sank.  Foreign  merchants  who 
had  opened  dollar  credits  and  had  failed  to  purchase  the 
dollars  to  cover  found  when  the  merchandise  arrived  and 
it  was  time  to  reimburse  the  issuing  banks  for  the  dollars 
which  had  been  paid  to  the  American  beneficiary,  that 
the  decline  in  the  value  of  their  currency  had  more  than 
wiped  out  their  expected  profit.  There  was  every  incen- 
tive,  therefore,   to   insist  upon   technicalities   which   had 

87 


88  AMERICAN  COMMERCIAL  CREDITS 

hitherto  been  ignored.  To  make  matters  worse,  there 
came  about  this  time  a  depression  in  merchandise  values 
abroad,  for  which  we  cannot  shirk  our  share  of  respon- 
sibility. Large  volumes  of  foreign  orders  which  had  been 
on  the  books  of  our  merchants  and  which  had  been 
neglected,  delayed,  or  even  forgotten  during  the  period 
in  which  more  money  could  be  made  from  filling  domestic 
orders,  were  resuscitated  and  filled  after  domestic  prices 
had  gone  down  and  dollar  exchange  had  gone  up.  The 
simultaneous  arrival  of  those  shiploads  of  merchandise  in 
foreign  ports  depressed  prices,  impaired  credit,  and 
resulted  in  the  refusal  of  goods  and  the  dishonor  of 
drafts. 

The  Shipping  Date 

As  a  market  approaches  such  a  period  of  decline,  the 
time  of  delivery  takes  on  increased  importance.  A  quick 
shipment  may  enable  the  buyer  to  get  his  wares  distributed 
while  the  price  remains  steady;  a  delayed  delivery  may 
expose  him  to  the  full  rigor  of  the  decline.  In  1919  this 
question  of  shipment  within  the  agreed  time  came  to  be  of 
the  essence  of  practically  every  mercantile  transaction.  It 
grew  more  and  more  to  be  the  practice  of  buyers  to  seek 
to  secure  themselves  in  this  regard  by  inserting  a  shipping 
date  in  the  stipulations  of  commercial  letters  of  credit. 
This  date  sometimes  coincided  with,  but  more  frequently 
antedated  by  a  short  period,  the  expiry  date  of  the  credit. 

Evidence  of  Shipment 

The  presence  of  a  stipulated  shipping  date  in  a  com- 
mercial credit  puts  the  burden  on  the  shipper  of  presenting, 
and  on  the  paying  or  negotiating  bank  of  examining,  some 
evidence  of  shipment.  What  this  evidence  was  to  be,  the 
credit  instruments  did  not  stipulate.    It  was  generally  as- 


CONSEQUENCES  OF  HAPHAZARD  GROWTH         89 

sumed,  however,  up  to  the  postwar  period  now  under 
discussion,  that  the  date  of  the  bill  of  lading  provided 
the  required  proof.  In  the  autumn  of  1919,  however,  a 
French  bank,  under  pressure  from  its  customer,  declined 
to  honor  a  payment  made  by  a  New  York  bank,  on  the 
ground  that  the  document  presented,  which  was  in  a 
form  that  had  come  to  be  currently  used  as  a  contract  of 
ocean  carriage,  was  not  a  bill  of  lading. 

The  Elements  of  a  Bill  of  Lading 

A  hurried  consultation  took  place  between  counsel  for 
the  larger  New  York  banks,  and  an  analysis  was  made  of 
the  forms  of  shipping  documents  which  were  being 
tendered  to  and  accepted  by  these  institutions.  In  con- 
sidering the  matter  counsel  were  hampered  by  the  fact 
that  there  was  no  agreed  definition  of  the  term  "bill  of 
lading."  The  phrase  as  defined  in  Benedict's  Admiralty 
is  as  follows: 

The  written  acknowledgment  of  the  reception  on  board  of  a 
particular  vessel  of  a  particular  quantity  or  parcel  of  goods,  to 
be  carried  to  a  particular  place  is  a  bill  of  lading. 

This  definition  appeared,  however,  in  practice  to  have 
been  extended  so  as  to  include  a  written  acknowledgment 
of  the  reception  of  goods  within  the  custody  or  control  of 
the  ship,  although  not  actually  on  board.  For  instance,  an 
acknowledgment  that  the  goods  had  been  received  on  the 
dock,  the  vessel  then  lying  alongside,  or  on  a  lighter  in  con- 
trol of  the  vessel,  for  delivery  to  the  ship,  seems  to  have 
been  regarded  by  our  courts  as  constituting  a  sufficient  bill 
of  lading.  However,  to  create  a  lien  on  the  ship,  the  bill 
of  lading  must  acknowledge  that  the  goods  are  received 
for  transportation  on  a  particular  vessel.    If  it  permits  the 


90  AMERICAN  COMMERCIAL  CREDITS 

carrier  to  transfer  the  goods  to  another  or  following  ship 
the  instrument  does  not  create  a  lien.  An  analysis  of 
thirteen  bills  of  lading,  picked  at  random  from  those 
issued  by  steamship  companies  operating  from  the  port  of 
New  York,  disclosed  the  fact  that  each  one  permitted  ship- 
ment on  a  vessel  other  than  the  one  named,  thus  depriving 
the  holder  of  the  protection  afforded  by  an  action  in  rem 
against  the  vessel  itself,  which  in  admiralty  law  is  known 
as  a  "libel."  None  acknowledged  receipt  of  the  goods  on 
dock,  on  board,  or  in  words  equivalent.  In  only  six  in- 
stances was  there  a  statement  that  the  vessel  named  in 
the  bill  of  lading  was  then  in  port.  In  view  of  the  serious 
and  far-reaching  consequences  that  this  state  of  affairs 
might  have  upon  the  banks,  it  was  thought  advisable  to 
seek  concerted  action  upon  the  subject. 

The  Conference 

Early  in  January,  1920,  a  representative  of  counsel  and 
a  member  of  the  staff  of  each  of  ten  New  York  banks, 
trust  companies,  and  private  bankers  doing  an  international 
business,  met  and  appointed  a  committee.  This  committee 
addressed  a  letter  to  the  leading  steamship  lines  operating 
in  the  port  of  New  York,  calling  their  attention  to  the  fact 
that  the  question  had  arisen  as  to  whether  banks  which 
were  directed  by  export  letters  of  credit  to  make  payments 
against  bills  of  lading  were  protected  in  making  such 
payments  against  the  documents  then  issued  as  such  by 
the  steamship  companies,  which  expressly  gave  them  the 
right  to  ship  the  goods  by  a  steamer  other  than  the  one 
mentioned  in  the  bill  of  lading  and  which  in  many  cases 
did  not  acknowledge  receipt  of  the  goods  on  board,  or  even 
on  dock.  The  banks  stated  that  while  they  could  not  con- 
tinue indefinitely  to  assume  the  risk  involved  in  accepting 
such  documents,  they  regarded  it  as  being  in  the  public 


CONSEQUENCES  OF  HAPHAZARD  GROWTH         91 

interest  to  defer  any  change  of  policy  until  after  confer- 
ence with  the  representatives  of  the  ocean  carriers.  These 
letters  resulted  then  in  the  subject  being  taken  in  hand, 
from  the  transportation  aspect,  by  the  Transatlantic  Asso- 
ciated Freight  Conference,  which  appointed  a  committee 
to  consult  with  the  bankers.  Several  joint  meetings  of  the 
bankers'  and  shippers'  committees  were  held  before  a  com- 
mon ground  was  found  on  which  to  reconcile  the  bankers' 
request  for  the  traditional  form  of  bill  of  lading  and  the 
transportation  companies'  insistence  that  modern  trans- 
portation conditions  compelled  some  modification  of  the 
older  form.  The  position  of  the  ocean  carriers,  and  the 
proposition  which  was  eventually  accepted  as  a  solution, 
were  set  forth  in  the  following  letter  to  the  bankers' 
committee : 

Referring  to  the  meeting  of  the  Committee  appointed  by  the 
Transatlantic  Associated  Freight  Conference  with  your  Committee 
on  February  17,  1920,  at  the  office  of  Messrs.  Shearman  &  Sterling, 
the  Steamship  Conference  confirms  the  statement  of  its  Committee 
that  the  procedure  in  this  port  of  issuing  Bills  of  Lading  against 
the  receipt  of  goods  on  the  steamship  company's  dock,  which  bill 
of  lading  acknowledges  receipt  of  the  goods  for  transportation 
by  a  named  steamer,  and  failing  shipment  by  said  steamer,  with 
liberty  to  ship  in  and  upon  a  prior  or  following  steamer,  is  the 
only  procedure  possible  under  conditions  existing  here,  and  that  it 
is  not  possible  here  to  issue  on  board  bills  of  lading. 

Export  cargo  moves  through  this  port  and  indeed  through  all 
North  Atlantic  ports  in  large  part  from  interior  points.  It  passes 
from  the  railroad  or  other  inland  carrier  into  custody  of  the 
steamship  company  usually  by  lighters.  Local  cargo  is  delivered 
by  trucks  at  such  time  as  is  convenient  to  the  shipper.  Cargo  from 
inland  points  moves  either  on  through  or  local  bills  of  lading 
issued  by  the  railroads  at  the  point  of  origin,  and  in  the  case  of 
through  bills  of  lading,  it  is  rare  for  any  particular  ship  to  be 
named  for  the  ocean  transportation.  Any  interruption  or  delay  of 
this  flow  of  cargo  causes  congestion  and  sometimes  railroad  em- 
bargoes on  the  port  and  exposes  the  shippers  to  demurrage  charges. 


92  AMERICAN  COMMERCIAL  CREDITS 

The  steamship  lines  are  compelled  by  these  conditions  to  provide 
shedded  piers  at  great  cost  to  themselves  and  to  receive  and  be- 
come responsible  for  the  goods  considerably  in  advance  of  loading 
on  the  ship,  and  necessarily  with  more  or  less  uncertainty  as  to  the 
particular  steamer  by  which  the  goods  can  go  forward.  The 
necessities  of  proper  stowage  and  the  irregularity  in  arrival  of 
shipments  combined  with  the  great  accumulation  of  cargo,  both 
inward  and  outward,  on  the  Piers,  and  for  different  steamers, 
render  it  physically  impossible  either  to  guarantee  loading  by  a 
particular  steamer  or  to  determine,  until  after  a  steamer  is  loaded 
and  the  dock  checked  up,  whether  any  specific  cargo  has  been 
loaded.  These  are  the  conditions  which  have  made  necessary 
the  present  form  of  B/L,  which  has  evolved  from  the  necessi- 
ties of  commerce  in  this,  and  generally  in  all  other  American 
ports. 

Regular  Lines,  such  as  the  Conference  Lines,  with  regular  and 
frequent  sailings,  through  their  ability  to  forward  goods  shut  out 
of  a  particular  steamer  by  other  steamers  sailing  soon  after,  keep 
the  goods  moving  forward  with  the  greatest  expedition  the  cir- 
cumstances permit.  A  limitation  in  freight  commitments  or  Bills 
of  Lading  exclusively  to  a  named  steamer  or  to  on-board  Bills 
of  Lading  would  involve  delays  and  detentions  and  render  it  im- 
possible to  conduct  the  business  under  these  conditions,  and  would 
result  in  great  loss  to  all  concerned. 

The  Steamship  Companies  feel  that  the  Banks'  difficulties  are 
due  primarily  to  the  desire  of  foreign  buyers  to  be  able  to  re- 
pudiate export  sales  contracts,  actually  for  the  reason  that  the 
market  or  exchange  has  gone  against  them,  but  ostensibly  on  a 
technical  interpretation  of  the  word  "shipments,"  contrary  to  the 
general  understanding  of  that  term  here.  Many  sellers  at  present 
fail  to  adjust  their  contracts  to  conditions  here,  and  it  is  suggested 
that  the  simple  way  out  of  the  difficulty  would  be  for  the  sellers 
here  to  arrange  their  contracts  to  conform  to  these  conditions  and 
that  the  Banks  use  their  influence  to  induce  them  to  do  so,  and  to 
induce  their  foreign  correspondents  in  future  to  modify  their 
instructions  so  that  the  banks  will  feel  at  liberty  to  accept  the 
customary  steamship  "Received  for  Transportation  Bill  of 
Lading." 

It  is  believed  that  the  plan  suggested  in  behalf  of  the  Bankers' 
Committee  for  an  on-board  endorsement  of  the  B/L  after  the 
goods  are  loaded,  would,  on  account  of  unavoidable  delay,  cause 


CONSEQUENCES  OF  HAPHAZARD  GROWTH    93 

•serious  trouble  for  the  shippers,  who  would  be  unable  in  many 
cases  to  forward  their  documents  by  the  ship  upon  which  the 
goods  go.  In  the  hope,  however,  that  it  will  lead  to  a  readjustment 
of  foreign  sales  contracts  and  of  the  form  of  local  credits  by 
foreign  banks  to  conform  to  the  conditions  here,  the  Steamship 
Companies  are  willing  after  the  goods  are  loaded,  so  far  as 
reasonably  practicable,  to  endorse  on  the  Bills  of  Lading  if 
returned  for  that  purpose  by  the  shippers,  a  dated  clause  to  the 
effect  that  the  within  goods  have  been  loaded  on  board,  specify- 
ing any  portion  that  has  been  short  shipped.  The  attention 
of  your  Committee,  however,  is  called  to  the  fact  that  this  will 
not  be  reasonably  practicable  in  all  trades,  nor  in  any  trade  at  all 
times. 

The  Conference  Lines  have  been  prompted  to  make  this  change 
in  their  practice  by  a  desire  to  meet  your  Committee  in  any  way 
the  conditions  will  permit.  They  hope,  however,  that  your  Com- 
mittee and  the  Bankers  you  represent  will  endeavor  to  use  their 
influence  to  secure  a  change  in  the  form  of  credits  and  in  the 
form  of  export  sales  contracts. 

Very  truly  yours, 
(Signed)  R.  H.  Blake 

W.  L.  Walther 
H.  Connor 
A.  C.  Fetterolf 
Special  Committee  on  behalf  of  the  following  Lines: 

American  Line 

Anchor  Line 

Atlantic  Transport  Line 

Bristol  City  Line 

Compagnie  Generale  Transatlantique 

Compagnie  Transatlantique  Beige 

Cosmopolitan  Line 

Cunard  Line 

Ellerman's  Phoenix  Line 

Ellerman's  Wilson  Line 

Punch,  Edye  &  Co.,  Inc.,  Lines 

Furness,  Withy  &  Co.,  Ltd.,  Lines 

La  Veloce 

Lamport  &  Holt  Line 

Leyland  Line 

Navigazione  Generale  Italiana 


94  AMERICAN  COMMERCIAL  CREDITS 

Norwegian  America  Line 
Red  Star  Line 
Transatlantic  Italiana 
White  Star  Line 
White  Star-Dominion  Line 
Fabre  Line 

Holland  America  Line 
-  United  Fruit  Company 

Received-for-Shipment  Bill  of  Lading  Not  an  Ameri- 
can Innovation 
There  has  been  some  attempt  on  the  part  of  our  com- 
petitors in  the  world  market  to  attach  responsibility  for 
the  development  and  use  of  the  received-for-shipment  bill 
of  lading  upon  American  steamship  lines  and  American 
merchants.  Some  of  our  consuls  have  even  sent  in  reports 
in  which  they  have  set  forth,  without  any  attempt  to  com- 
bat them,  criticisms  by  foreign  merchants  of  our  use  of 
this  type  of  contract  of  carriage  as  another  evidence  of 
the  unfairness  of  Yankee  export  methods.  It  is  worth 
while  consequently  to  record  the  testimony  of  W.  W. 
Paine,  Joint  General  Manager  of  Lloyds  Bank,  Ltd.,  and 
a  delegate  of  the  British  Bankers  Association  to  the  Inter- 
national Law  Association  Hague  Conference  of  192 1,  that 
the  received-for-shipment  bill  of  lading  was  a  form  of 
document  upon  which  one  at  least  of  England's  greatest 
import  trades  had  been  carried  on  for  the  past  twenty 
years.  Convincing  testimony  on  this  same  subject  has 
been  compiled  by  T.  P.  Alder,  Treasurer  of  the  United 
Steel  Products  Company,  to  furnish  an  answer  to  claims 
made  by  British  customers  that  by  using  received-for- 
shipment  bills  of  lading  his  company  was  taking  an  ad- 
vantage of  foreigners  such  as  was  not  taken  by  English 
exporters  with  respect  to  their  foreign  customers.  Mr. 
Alder's  statement  follows: 


CONSEQUENCES  OF  HAPHAZARD  GROWTH    95 

Some  time  ago  we  obtained  as  complete  as  possible  copies  of 
the  actual  bills  of  lading  in  use  by  steamship  companies  sailing 
from  Great  Britain  so  that  we  could  study  them  and  personally 
ascertain  the  actual  facts.  Up  to  the  present  time  we  have  received 
96  different  forms  as  the  result  of  this  request.  We  doubt,  how- 
ever, if  this  represents  anything  but  the  Liverpool,  and  to  a  certain 
extent,  the  London  steamship  forms,  and  with  respect  to  London, 
only  a  very  small  proportion.  It  is  generally  conceded  that 
Great  Britain  has  a  much  larger  number  of  steamship  lines  oper- 
ating from  Great  Britain  than  is  the  case  with  the  United  States, 
yet  our  own  Freight  Department  has  furnished  us  with  205  speci- 
mens of  United  States  forms  and  they  do  not  claim  that  they  have 
exhausted  the  steamship  lines  operating  from  the  United  States. 
But  taking  the  96  forms  of  steamship  lines  operating  from  Great 
Britain,  80  of  the  forms  are  distinctly  "received  for  transporta- 
tion" bills  of  lading  and  only  16  are  "on  board"  bills  of  lading. 
Among  the  "received  for  transportation"  bills  of  lading  are  all 
of  the  representative  Transatlantic  lines  and  it  would  therefore 
seem  that  if  a  British  company,  operating  steamers  between  Great 
Britain  and  America  on  shipments  from  Great  Britain,  issues 
"received  for  shipment"  bills  of  lading  a  British  subject  should 
not  complain  if  steamships  operating  from  the  United  States  to 
Great  Britain  issue  similar  bills  of  lading,  and  in  any  event,  should 
not  assume  that  in  the  United  States  advantage  is  being  taken  of 
the  foreigner  which  is  never  practiced  by  the  Englishman. 

What  Is  Shipment? 

Along  with  the  development  of  the  received- for-ship- 
ment  bill  of  lading,  it  ca^e  to  be  the  belief  of  certain 
exporters  that  they  had  fulfilled  their  obligation  to  make 
shipment  of  goods  to  a  foreign  buyer  by  a  stipulated  date, 
by  delivering  the  goods  prior  to  that  time  to  an  ocean 
carrier  and  receiving  a  received- for-shipment  bill  of  lading 
providing  for  their  eventual  transportation.  Such  decisions 
as  there  had  been  in  this  country,  in  state  and  federal 
courts,  went  no  further  than  to  hold  that  shipment  was 
made  when  merchandise  was  delivered  either  on  board  or 
alongside,  and  a  bill  of  lading  was  issued  by  the  owners  or 


96  AMERICAN  COMMERCIAL  CREDITS 

agents  of  the  vessel.  It  was  contended  by  certain  ex- 
porters that  by  universal  custom  the  definition  of  "ship- 
ment" had  been  extended  as  indicated.  This  appeared, 
however,  to  be  an  argument  of  convenience,  not  stand- 
ing up  well  when  applied  to  these  merchants  as  importers. 
Take,  for  example,  the  case  of  an  American  importer 
who  in  May,  1920,  while  the  sugar  market  throughout  the 
world  was  rising,  contracted  to  purchase  sugar  from  Java 
for  shipment  before  August  30.  During  June  and  July 
the  sugar  market  continued  to  rise  and  the  seller  in  Java, 
being  offered  new  contracts  at  higher  prices,  used  the 
sugar  he  intended  for  his  May  contract  to  fill  them.  In 
August  the  market  began  to  slump  and  the  seller,  finding 
it  easy  to  procure  sugar  in  Java  at  distress  prices,  pur- 
chased the  required  tonnage  and  delivered  it  to  a  steamship 
dock  on  August  30.  There  was  no  vessel  in  port,  but  a 
steamship  company  issued  a  received-for-shipment  bill  of 
lading.  The  vessel  which  eventually  arrived  in  Java  and 
loaded  the  sugar  reached  New  York  in  January,  1921, 
when  the  market  was  at  its  lowest  point.  It  is  rather 
obvious  that  the  American  importer  of  this  sugar  would 
argue  that  what  he  intended  to  require,  so  as  to  reap  the 
benefit  of  his  transaction,  was  the  beginning  of  the  actual 
transit  of  the  goods  by  the  end  of  August,  and  not  their 
delivery  to  a  dock  and  the  promise  that  they  would  be 
transported  when  the  steamship  company  found  it  con- 
venient. There  cannot  be  one  custom  and  one  law  for 
exporters  and  another  custom  and  another  law  for  im- 
porters. The  banks  can  accommodate  themselves  to  any 
settlement  which  merchants  might  desire  to  make  of  the 
question,  but  so  long  as  merchants  were  permitted  to  blow 
both  hot  and  cold  on  this  question,  as  suited  their  con- 
venience, the  banks  were  bound  to  fare  poorly — no  matter 
from  which  side  of  the  bowl  they  supped. 


CONSEQUENCES  OF  HAPHAZARD  GROWTH         97 

Foul  Bills  of  Lading 

In  the  meantime  the  existence  of  a  further  risk  was  thrown 
into  the  foreground  as  a  result  of  a  decision  rendered  on 
October  29,  191 9,  in  the  Court  of  Appeal  of  the  Supreme 
Court  of  Judicature  in  London.  Hannevig's  Bank,  Ltd., 
being  interested  on  joint  account  with  a  Manchester  firm 
in  the  purchase  of  onions  from  Egypt,  requested  the  Na- 
tional Bank  of  Egypt  to  cable  through  their  Alexandria 
office  a  confirmed  sight  credit  in  favor  of  the  Egyptian  sup- 
plier against  delivery  of  "bills  of  lading"  and  other  docu- 
ments. The  Alexandria  office  of  the  National  Bank  of 
Egypt  accepted  bills  of  lading  for  a  shipment  of  531  bags 
of  onions  bearing  the  notation  "several  bags  torn  and  re- 
sewn."  Because  of  the  foul  bills  of  lading,  Hannevig's 
Bank  declined  to  reimburse  the  National  Bank  of  Egypt, 
which  brought  action  for  the  recovery  of  the  money  paid 
out.  The  Court  of  Appeal  reversed  the  decision  of  the 
trial  court  which  had  been  in  favor  of  Hannevig's  Bank, 
Ltd.,  but  as  its  judgment  was  based  upon  some  unusual 
circumstances  which  had  arisen  in  connection  with  the  case, 
the  judgment  cannot  be  regarded  as  a  precedent. 

Lord  Justice  Scrutton,  in  his  decision  of  the  case,  said : 

To  assume  that  for  1/16  per  cent,  of  the  amount  he  advances  a 
banker  is  bound  carefully  to  read  through  all  bills  of  lading  pre- 
sented to  him  in  ridiculously  minute  type  and  full  of  exceptions, 
to  read  through  the  policies  and  to  exercise  a  judgment  as  to 
whether  the  legal  effect  of  the  bill  of  lading  and  the  policy  is,  on 
the  whole,  favorable  to  their  clients,  is  an  obligation  which  I 
should  require  to  investigate  considerably  before  I  accepted  in 
that  unhesitating  form. 

The  decision,  however,  was  made  on  other  grounds, 
and  as  the  question  had  been  raised  but  not  decided,  banks 
which  issued  credits  were  inclined  to  dodge  the  issue  by 
7 


98  AMERICAN  COMMERCIAL  CREDITS 

passing  it  on  to  the  accredited  buyer  and  the  paying  or 
negotiating  bank.  They  were  unwilling  to  agree  with  the 
correspondents  which  acted  as  their  paying  agents  or  with 
negotiating  banks  that  they  could  receive  without  question 
bills  of  lading  containing  rubber-stamped  notations  of  the 
usual  sort  with  relation  to  the  condition  of  the  merchan- 
dise or  its  container.  They  were  also  unwilling  to  con- 
strue a  guaranty  from  the  beneficiary,  by  which  he 
undertook  to  make  good  any  loss  resulting  from  the 
notations,  as  covering  only  the  damage  arising  from  the 
notation.  They  insisted  on  regarding  such  notations  as 
evidence  of  an  irregularity  which  permitted  the  buyer,  if 
he  chose,  to  reject  the  merchandise  totally. 

No  Uniformity  of  Banking  Practice 

The  National  City  Bank  of  New  York,  in  an  endeavor 
to  bring  its  commercial  credit  practice  as  closely  as  pos- 
sible into  conformity  with  continental  usage,  had  sought, 
by  means  of  a  questionnaire  submitted  to  Scandinavian 
bankers  through  its  Scandinavian  representative,  to  ascer- 
tain whether  there  was  any  uniformity  of  practice  con- 
cerning some  further  questions  which  had  come  into 
controversy.  For  instance,  if  a  credit  was  valid  until  a 
certain  date,  was  payment  permitted  up  to  and  including 
the  date  mentioned?  If  a  credit  expired  on  a  Sunday  or 
a  holiday,  did  the  authority  to  effect  payment  terminate 
on  the  day  preceding  or  the  day  following  the  Sunday 
or  holiday?  If  the  bill  of  lading  was  dated  prior  to  the 
expiration  date  but  presented  afterward,  was  the  bene- 
ficiary still  entitled  to  payment?  If  the  terms  of  the 
credit  did  not  specify  that  the  entire  quantity  of  mer- 
chandise was  to  be  shipped  in  one  lot,  were  part  ship- 
ments in  order?  The  information  received  indicated  that 
there  was  no  uniformity  of  understanding,  even  among 


CONSEQUENCES  OF  HAPHAZARD  GROWTH    99 

bankers  in  the  same  locality,  with  regard  to  most  of  these 
questions.  In  a  community  as  closely  knit  as  Scandinavia 
twelve  of  the  banks  were  of  the  opinion  that  a  credit 
valid  until  a  certain  date  authorized  payment  to  be  made 
up  to  and  including  the  date  mentioned,  while  five  were 
of  a  contrary  belief.  On  the  question  as  to  whether  a 
credit  falling  due  on  a  Sunday  or  holiday  should  be 
regarded  as  having  terminated  on  the  day  preceding  or 
the  day  following,  six  Swedish  banks  were  of  the  opinion 
that  the  preceding  day  marked  the  termination  of  the 
credit,  while  only  one  Swedish  bank  took  the  opposite 
view.  The  Danish  banks  consulted  were  unanimously 
of  the  opinion  that  the  preceding  day  should  be  consid- 
ered the  last  day  for  payment,  while  in  Norway  two 
of  the  banks  were  of  the  same  opinion  and  four  took 
the  contrary  view. 

Confusion  Concerning  Definition  of  Trade  Terms 

The  necessity  for  brevity  of  expression  in  order  to 
save  expense  when  negotiations  are  conducted  by  cable 
was  probably  the  largest  contributing  factor  toward  the 
adoption  of  abbreviated  forms  of  export  price  quotations, 
which  is  another  source  of  confusion  in  foreign  trade 
circles.  While  these  abbreviations  came  to  be  substan- 
tially synonymous,  they  varied  somewhat  according  to  the 
locality.  For  instance,  there  were  manufacturers  who 
quoted  f.o.b.  cars,  f.o.b.  works,  f.o.b.  mill,  f.o.b.  factory, 
or  f.o.b.  (named  port).  While  confusion  and  controversy 
resulted  from  the  use  of  an  excessive  number  of  abbrevi- 
ated forms  of  this  character  with  substantially  similar 
meaning,  more  harm  resulted  from  the  use  of  abbrevi- 
ations in  a  sense  different  from  their  original  meaning  or 
in  a  sense  not  ordinarily  given  them  and  different  from 
that  understood  in  other  communities.    For  instance,  the 


loo  AMERICAN  COMMERCIAL  CREDITS 

quotation  "f.o.b.  (named  port)"  was  often  used  by  in- 
land producers  and  distributors  to  mean  merely  delivery 
of  goods  at  the  railway  terminal  at  the  port  named. 
This  abbreviation  originated,  however,  as  an  export  quo- 
tation and  had  no  application  to  inland  shipment.  The 
meaning  universally  given  to  the  phrase  among  foreigners, 
therefore,  was  that  it  comprehended  delivery  of  the 
goods  upon  an  overseas  vessel  at  the  port  named. 

The  American  Foreign  Trade  Definitions 

The  matter  of  simplifying  and  standardizing  Ameri- 
can foreign  trade  definitions,  so  as  to  reduce  the  con- 
fusion and  avoid  the  controversy  which  was  continually 
arising,  was  taken  in  hand  in  19 19  by  a  conference  com- 
posed of  representatives  of  nine  of  the  great  commercial 
organizations  of  the  United  States  interested  in  foreign 
trade — the  National  Foreign  Trade  Council,  Chamber  of 
Commerce  of  the  United  States  of  America,  National 
Association  of  Manufacturers,  American  Manufacturers 
Export  Association,  Philadelphia  Commercial  Museum, 
American  Exporters  and  Importers  Association,  Chamber 
of  Commerce  of  the  State  of  New  York,  New  York 
Produce  Exchange,  and  New  York  Merchants  Associa- 
tion. The  conference  was  held  in  India  House,  New 
York,  and  on  December  16,  19 19,  as  a  result  of  its  deliber- 
ations, it  adopted  the  American  Foreign  Trade  Definitions. 
There  was  reason  to  expect,  therefore,  that  in  due  time 
these  recommendations  would  receive  such  adherence  on 
the  part  of  American  producers  and  distributors  as  to 
make  them  the  standard  American  practice,  but  they  did 
not  during  the  period  under  consideration  have  as  yet 
the  force  of  law  or  any  established  practice.  Conse- 
quently, although  they  could  be  resorted  to  by  bankers 
as  an  argument  in  defense  of  the  interpretation  placed 


CONSEQUENCES  OF  HAPHAZARD  GROWTH        loi 

by  them   on  export  quotations   contained   in   letters   of 
credit,  they  could  not  serve  as  an  absolute  reliance. 

The  Need  for  Regulations 

All  these  problems  pertaining  to  the  shipping  date 
and  evidence  of  shipment,  to  foul  bills  of  lading  and 
lack  of  uniformity  in  contracts  of  carriage,  to  absence 
of  uniform  interpretation  of  the  ordinary  language  of 
business  and  the  customary  terms  employed  to  designate 
terms  of  sale,  were  mercantile  problems.  Bankers  were 
not  primarily  interested  in  the  kind  of  solution  arrived 
at  with  respect  to  these  problems,  but  they  required  some 
solution.  Without  it,  they  sat  continuously  in  a  vise, 
with  either  buyer  or  seller  at  liberty  to  apply  the  screw. 
The  ultimate  solution,  by  the  adoption  of  a  uniform 
definition  of  those  terms  which  simply  need  clarification, 
and  by  the  selection  of  a  fair  middle  ground  for  com- 
promise of  the  conflicting  interests  involved  in  the  prob- 
lem in  which  mutual  considerations  of  benefit  and  detri- 
ment were  factors,  was,  and  is,  a  task  for  merchants. 
Yet  there  were,  at  the  time  these  problems  became  acute, 
no  mercantile  agencies  with  a  sufficiently  comprehensive 
membership  and  a  sufficiently  adequate  authority  to  under- 
take their  immediate  solution,  and  the  risk  was  too  great 
to  delay  action  until  proper  mercantile  agencies  had  been 
created  and  spurred  to  action.  There  was  no  option  for 
the  banks  but  to  avail  themselves  of  such  materials  as 
were  at  hand,  and,  where  these  were  lacking,  devise  their 
own  expedients  for  creating  a  workable  set  of  regulations 
covering  these  controversial  matters. 


CHAPTER  VII 

THE  REGULATIONS  OF  1920  AND  THEIR 
RESULTS 

Regulations  Adopted  ^ 

Regulations  defining  the  position  which  the  banks 
that  had  participated  in  the  New  York  Bankers  Com- 
mercial Credit  Conference  of  1920  on  the  subject,  would 
take  on  the  controversial  matters  mentioned  in  the  pre- 
ceding chapter,  in  the  absence  of  definite  advice  as  to  the 
position  taken  by  their  principals,  were  finally  adopted 
and  subscribed  to  by  35  banking  institutions.  The 
peculiar  nature  of  the  situation  saved  this  action  from 
any  taint  of  dictation.  The  banks  had  always  been  ready 
to  follow  any  definite  instructions  which  had  been  given 
them.  The  recommendations  which  were  adopted  were 
expressly  made  applicable  only  in  the  instances  in  which 
the  issuing  banks  or  the  accredited  buyers  had  failed  to 
indicate  their  attitude  toward  controversial  matters  or 
had  employed  language  which  was  susceptible  of  a  double 
interpretation.  The  report  of  the  committee  which  had 
the  matter  directly  in  hand  was  as  follows: 

At  a  conference  of  New  York  banking  institutions  held  at  the 
office  of  Shearman  &  Sterling,  55  Wall  Street,  New  York  City,  on 
January  12th,  1920,  the  undersigned  were  appointed  a  committee,  to 
confer  with  a  similar  committee  representing  steamship  lines  do- 
ing business  in  this  and  other  ports,  with  the  object  of  adopting 
some  procedure  to  avoid  the  risk  to  the  banks  involved  in  accept- 
ing as  bills  of  lading  the  documents  now  issued  as  such.  Your  com- 
mittee was  also  empowered  to  consider  other  commercial  credit 
problems  in  which  concerted  action  by  the  banks  was  desirable. 

102 


THE  REGULATIONS  OF  1920  103 

Action  was  taken  which  resulted  in  the  appointment  by  the 
Transatlantic  Associated  Freight  Conferences  of  a  special  steam- 
ship committee,  consisting  of  Mr.  R.  H.  Blake  of  the  Cunard 
&  Anchor  Lines,  Mr.  A.  C.  Fetterolf,  of  the  International  Mer- 
cantile Marine  Lines,  Mr.  W.  L.  Walther,  of  Funch,  Edye  & 
Company,  Ltd.,  Lines,  Mr.  H.  Connor  of  Furness,  Withy  &  Com- 
pany, Ltd.,  Lines,  and  Mr.  John  D.  O'Reilly  of  Norton,  Lilly 
&  Company.  This  committee  was  assisted  in  its  deliberations  by 
a  committee  of  counsel  consisting  of  Mr.  Charles  R.  Hickox,  Mr. 
Everett  Masten,  and  Mr.  Ralph  M.  Bullowa.  Similar  service  was 
rendered  to  your  committee  by  Mr.  George  H.  Gardiner,  Mr.  Carl 
A.  Mead  and  Mr.  Frank  M.  Patterson. 

There  were  two  sessions  of  the  joint  committees,  at  which  the 
situation  was  thoroughly  discussed. 

The  representatives  of  the  steamship  lines  insisted  that  port 
conditions  had  necessitated  the  development  of  the  form  of  bill 
of  lading  now  in  use,  exception  to  the  continuance  of  which  has 
been  taken,  and  that  this  form  has  been  in  common  use  for  many 
years.  Moreover,  they  contended  that  the  consignees  who  had 
objected  to  its  use  were  actuated  more  by  the  desire  to  escape  the 
loss  occasioned  by  a  falling  market  or  an  unfavorable  turn  in 
exchange  rates,  than  by  the  desire  to  be  reimbursed  for  actual 
damages  resulting  directly  from  any  legal  insufficiency  of  the  bills 
of  lading.  Furthermore,  they  asserted  that  the  banks  could  secure 
the  relief  they  desired  by  notifying  their  correspondents  that 
acceptance  of  the  form  of  bill  of  lading  customarily  issued  in  our 
ports,  must  be  comprehended  in  all  authorizations  to  make  pay- 
ments upon  shipping  documents. 

On  the  other  hand,  your  committee  has  been  advised  by  its 
counsel  that  the  form  to  which  objection  has  been  made  does  not 
create  a  lien  upon  any  ship  for  carriage,  and,  consequently,  lacks 
one  of  the  originally  important  characteristics  of  a  bill  of  lading. 
Moreover,  having  in  mind  the  fact  that  the  form  fails  to  assure 
reasonably  prompt  shipment,  an  essential  element  in  most  com- 
mercial credits,  your  committee  is  of  the  opinion  that  the  banks 
should  not  arbitrarily  notify  their  correspondents  that  in  dealing 
with  the  United  States  their  customers  must  in  all  cases  relinquish 
the  benefit  of  a  strict  bill  of  lading. 

The  root  of  the  difficulty,  it  is  generally  agreed,  lies  in  the  fact 
that  the  minds  of  the  seller  and  buyer  do  not  meet  on  the  question 
of  delivery.    The  seller  expects  to  receive  payment  when  the  goods 


I04  AMERICAN  COMMERCIAL  CREDITS 

are  delivered  to  the  steamship  company,  whereas  the  buyer  expects 
payment  to  be  made  only  when  the  goods  are  on  board.  The  rep- 
resentatives of  the  steamship  companies  contend  that  the  banks 
should  follow  the  sellers'  attitude.  Your  committee  was  unable 
to  adopt  this  view  for  the  reasons  already  stated,  and  deemed  it 
necessary  to  insist  that  some  means  be  provided  to  enable  shippers 
to  obtain  "on  board"  bills  of  lading  when  necessary.  The  con- 
ference steamship  lines  have  now  agreed  to  accomplish  the  desired 
result,  where  practicable,  by  means  of  an  endorsement  on  the  bills 
of  lading  as  outlined  in  their  letter  of  March  loth,  1920. 

Your  committee  is  of  the  opinion  that  means  are  thus  afforded 
to  shippers  to  obtain  "on  board"  bills  of  lading  upon  explicit 
request  therefor. 

In  view,  however,  of  the  obvious  annoyance  and  delay  of  the 
endorsement  system,  your  committee  recommends  a  communica- 
tion by  the  banks  to  their  correspondents,  as  outlined  in  a  subse- 
quent portion  of  the  report.  Under  the  practice  to  be  established 
as  the  result  of  such  a  communication,  buyers  who  desire  to  have 
payment  effected  only  against  "on  board"  bills  of  lading  may 
insist  upon  such  a  requirement,  but  otherwise,  the  banks  will  be 
authorized  to  accept  "customary"  bills  of  lading. 

In  considering  the  whole  subject  of  commercial  credit  opera- 
tion, your  committee  has  been  impressed  by  the  serious  character 
of  other  unnecessary  risks  now  being  assumed  by  the  banks,  be- 
cause of  a  similar  lack  of  understanding  between  buyer  and  seller, 
and  between  the  issuing  and  the  paying  bank,  concerning  the  regu- 
lations and  customs  by  which  the  parties  interested  are  to  be 
guided  in  their  interpretation  and  solution  of  various  problems 
which  constantly  arise.  Your  committee  believes  that  these  risks 
can  be  obviated  by  the  adoption  of  uniform  regulations,  and  sub- 
jecting all  credit  transactions  to  such  regulations.  We  annex  and 
submit  a  form  of  such  proposed  regulations.  They  include  the 
recommendations  of  the  committee  with  regard  to  the  bill  of  lad- 
ing situation. 

Your  committee  consequently  recommends: 

1.  The  immediate  adoption,  by  the  banks  comprising  this  con- 
ference, of  the  practice  of  requesting  the  "on  board"  endorsement 
on  bills  of  lading  accepted  in  export  commercial  credit  operations 
only  when  explicitly  required;  in  all  other  cases  accepting  the 
"customary"  bills  of  lading. 

2.  The  immediate  adoption  by  the  banks,  comprising  this  con- 


THE  REGULATIONS  OF  1920  105 

ference,  of  the  regulations  annexed;  each  bank  to  notify  its  own 
correspondents  of  their  adoption,  and  to  make  the  general  prin- 
ciples of  interpretation  part  of  its  commercial  credit  instruments 
by  incorporation  or  reference. 

3.  The  continuance  of  the  committee  in  order  to  increase  the 
membership  in  the  conference,  to  secure  the  cooperation  of  the 
steamship  lines  not  included  in  the  report  of  the  steamship  con- 
ference, to  confer  with  other  committees  and  conferences  on  the 
adoption  of  a  uniform  bill  of  lading,  and  generally  to  consider 
and  report  from  time  to  time  upon  further  questions  in  which 
joint  action  would  appear  advisable. 

Frank  E.  J.  Bower 
Ernest  H.  Kuhlmann 
Junius  S.  Morgan,  Jr. 
Edwin  T.  Rice 
WiLBERT  Ward 

Committee 

The  resolutions  which  were  adopted  took  the  form 
of  instructions  by  the  banks  to  their  foreign  corre- 
spondents and  as  thus  addressed  were  as  follows: 

Pajrments  under  Export  Commercial  Credits  advised  to  the 
undersigned  are  made  in  conformity  with  the  following  regula- 
tions, which  are  in  accord  with  the  standard  practice  adopted  by 
the  New  York  Bankers  Commercial  Credit  Conference  of  1920: 

1.  We  assume  no  liability  or  responsibility  for  the  form,  suf- 
ficiency, correctness,  genuineness  or  legal  effect  of  any  documents, 
or  for  the  description,  quantity,  quality,  condition,  delivery  or 
value  of  the  merchandise  represented  thereby,  or  for  the  good 
faith  or  acts  of  the  shipper  or  any  other  person  whomsoever;  but 
documents  will  be  examined  with  care  sufficient  to  ascertain 
whether  on  their  face  they  appear  to  be  regular  in  general  form. 

2.  We  will  interpret  the  terms  "documents,"  "shipping  docu- 
ments" and  words  of  similar  import,  as  comprehending  only 
ocean  bills  of  lading  (sailer  bill  of  lading  included)  and  marine 
and  war  risk  insurance,  in  negotiable  form,  with  invoices. 

3.  Unless  specifically  otherwise  instructed,  we  will  accept  "re- 
ceived for  transportation"  bills  of  lading  in  the  form  customarily 
issued    in    New    York.      (The   steamship   lines    constituting    the 


lo6  AMERICAN  COMMERCIAL  CREDITS 

Transatlantic  Conference  state  that  the  customary  procedure 
necessitated  by  American  port  conditions,  is  to  issue  bills  of 
lading  against  the  receipt  of  goods  into  the  custody  of  the  steam- 
ship owners  or  agents,  for  transportation  by  a  named  steamer, 
and  failing  shipment  by  said  steamer,  with  liberty  to  ship  in  and 
upon  a  prior  or  following  steamer.  They  state  that  it  is  not 
possible  here  to  issue  "on  board"  bills  of  lading,  but  have  agreed, 
after  the  goods  are  loaded,  so  far  as  reasonably  practicable,  to 
endorse  on  the  bills  of  lading,  if  returned  for  the  purpose  by  the 
shippers,  a  dated  clause  to  the  effect  that  the  within  goods  have 
been  loaded  on  board,  specifying  any  portion  that  has  been  "short 
shipped."  They  represent,  however,  that  such  procedure  will  not 
be  reasonably  practicable  in  all  trades,  nor  in  any  trade  at  all 
times,  and  where  used,  on  account  of  the  delay  involved,  may 
result  in  the  merchandise  arriving  at  destination  in  advance  of 
the  bills  of  lading.)  When  specifically  requested  by  a  correspon- 
dent, we  will  request  the  "on  board"  endorsement,  and  obtain  it, 
where  practicable. 

4.  When  the  "on  board"  endorsement  is  not  specifically  re- 
quested by  a  correspondent,  or  it  is  impracticable  to  obtain  it,  the 
date  of  the  bill  of  lading  will  be  taken  to  be  the  date  upon  which 
shipment  has  been  effected.  When  the  "on  board"  endorsement 
is  obtained,  the  date  of  such  endorsement  will  be  taken  to  be  the 
date  upon  which  shipment  has  been  effected. 

5.  Instructions  shall  be  interpreted  according  to  our  law  and 
customs,  but  in  any  event,  in  accordance  with  the  following 
general  rules: 

A.  Forwarders  bills  of  lading  will  not  be  accepted,  unless 
specially  authorized.  Railroad  through  bills  of  lading  will  not  be 
accepted,  except  on  exportations  to  the  Far  East  via  Pacific  ports, 
unless  expressly  stipulated. 

B.  Bills  of  lading  shall  contain  no  words  qualifying  the  ac- 
ceptance of  the  merchandise  in  apparent  good  order  and  condition. 
If  "on  board"  bills  of  lading  are  stipulated,  they  shall  acknowl- 
edge receipt  of  the  goods  on  board  a  named  vessel.  Otherwise, 
"received  for  transportation"  bills  of  lading,  which  acknowledge 
the  receipt  of  the  goods  into  the  custody  of  the  steamship  owners 
or  agents  for  transportation  by  a  named  steamer,  and  failing  ship- 
ment by  said  steamer  with  liberty  to  ship  in  and  upon  a  prior  or 
following  steamer  will  be  accepted;  and  insurance  certificates,  if 
required,  shall  cover  shipment  correspondingly. 


THE  REGULATIONS  OF  1920  107 

C.  Documents  for  partial  shipments  will  be  accepted,  even  if 
the  pro  rata  value  cannot  be  verified,  unless  expressly  prohibited. 

D.  The  use  of  "to,"  "until,"  "on,"  and  words  of  similar  import, 
in  indicating  expiration,  is  interpreted  to  include  the  date 
mentioned. 

E.  When  the  indicated  expiration  date  for  payment  falls  upon 
a  Sunday  or  legal  holiday  here,  the  expiration  is  extended  to  the 
next  succeeding  business  day. 

F.  The  terms  "prompt  shipment,"  "immediate  shipment,"  "ship- 
ment as  soon  as  possible"  and  words  of  similar  import,  shall  be 
interpreted  as  requiring  shipment  to  be  effected  and  (if  the  credit 
advice  is  without  expressed  duration)  the  stipulated  documents 
presented  for  payment  within  thirty  days  from  the  date  of  our 
credit  advice. 

G.  Our  credit  advice,  if  without  expressed  duration,  shall  not 
continue  in  force  longer  than  one  year  from  its  date. 

H.  The  stipulated  documents  must  all  be  presented  not  later 
than  3  p.  m.  (or  twelve  o'clock,  noon,  if  Saturday),  on  the 
indicated  expiration  date. 

/.  The  terms  "approximately,"  "about,"  or  words  of  similar 
import  shall  be  construed  to  permit  a  variation  of  not  to  exceed 
ten  per  centum, 

/.  Definitions  of  Export  Quotations  will  be  those  adopted  by 
The  National  Foreign  Trade  Council,  Chamber  of  Commerce  of 
the  U.  S.  A.,  National  Association  of  Manufacturers,  American 
Manufacturers'  Export  Association,  Philadelphia  Commercial 
Museum,  American  Exporters'  and  Importers'  Association,  Cham- 
ber of  Commerce  of  the  State  of  New  York,  N.  Y.  Produce  Ex- 
change, and  New  York  Merchants'  Association,  at  a  conference 
held  in  India  House,  N.  Y.,  on  December  16,  1919. 

6.  Correspondents  will  understand  that  the  above  regulations 
shall  govern  in  all  credit  transactions  in  the  absence  of  other 
specific  agreements.  If  the  beneficiary  shall  make  representations, 
or  shall  offer  security,  satisfactory  to  the  bank,  that  no  loss  shall 
result  to  its  correspondent  or  client  by  the  waiver  of  any  such 
regulations  or  any  instruction,  the  bank  reserves  the  right  to 
make  such  waiver,  and  shall  recognize  no  claim  in  the  premises 
unless  substantial  direct  damage  shall  be  shown  to  have  resulted. 

Over  30,000  copies  of  these  regulations  and  of  the 
definitions  of  export  quotations  referred  to  in  the  regula- 


io8  AMERICAN  COMMERCIAL  CREDITS 

tions  were  distributed  individually  by  the  conference 
members  to  their  various  correspondents  throughout  the 
world. 

Protection  Afforded  by  the  Regulations 

There  is  no  way  to  calculate  the  amount  of  contro- 
versy and  dispute  which  was  prevented  by  the  adoption 
of  the  regulations.  Some  approximation,  however,  of 
the  protection  they  afforded  all  parties  concerned  by  the 
elimination  of  possible  points  of  dispute  can  be  arrived 
at  by  considering  for  a  moment  the  subsequent  history 
of  one  of  the  topics.  The  regulations  effectively  termin- 
ated disputes,  so  far  as  the  question  of  evidence  of  ship- 
ment was  concerned,  by  stating  that  in  the  absence  of 
instructions  to  the  contrary  a  received- for-transportation 
bill  of  lading  would  be  accepted  and  that  the  date  of  such 
a  bill  of  lading  would  be  regarded  as  the  date  of  ship- 
ment. The  buyer,  on  the  other  hand,  was  afforded 
adequate  protection  by  the  agreement  secured  by  the 
conference  from  steamship  companies,  comprising  the 
Transatlantic  Associated  Freight  Conference  which  af- 
forded him  the  opportunity  to  authorize  payment,  if  he 
preferred,  only  against  receipt  of  a  bill  of  lading  bearing 
an  indorsement  that  the  goods  had  been  loaded  on  board, 
lliere  is  no  record  of  any  controversy  having  arisen 
between  any  parties  concerned  regarding  these  provisions, 
which  appear  to  have  worked  out  with  absolute  fairness 
to  buyer,  seller,  and  the  banks,  alike.  On  the  other  hand, 
in  the  cases  in  which  there  has  been  no  such  agreement 
there  has  been  an  endless  amount  of  confusion  and  liti- 
gation between  the  various  parties  concerned  in  the  trans- 
actions, which  has  at  present  thrown  the  question  of  what 
constitutes  a  bill  of  lading  and  what  constitutes  evidence 
of  shipment  into  utter  confusion. 


THE  REGULATIONS  OF  1920  109 

In  this  country  this  question  arose  in  connection  with 
the  case  of  Victor  v.  National  City  Bank  of  New  York. 
The  beneficiary  of  the  credit  contracted  to  sell  tin  plate 
to  a  Spanish  customer  on  a  c.i.f.  basis  for  shipment 
"within  October  15,"  and  the  buyer  established  a  com- 
mercial credit  with  that  stipulation  through  the  National 
City  Bank  in  favor  of  the  seller.  Around  the  middle  of 
October  there  was  no  vessel  in  the  port  of  New  York 
loading  cargo  for  Spain.  There  was  a  shipping  company 
operating  vessels  over  a  triangular  route,  Spain  to  Havana, 
Havana  to  New  York,  and  New  York  to  Spain.  At  the 
time  there  was  a  vessel  in  Havana  which,  after  unload- 
ing there,  was  to  proceed  to  New  York  and  load  for 
Spain.  On  October  15,  however,  the  vessel  had  not  yet 
reached  the  port  of  New  York.  The  beneficiary,  never- 
theless, delivered  his  merchandise  to  the  shipping  com- 
pany, which  received  it  on  its  dock  and  issued  a  bill  of 
lading  reciting  that  the  merchandise  was  "received  for 
shipment."  This  bill  of  lading  was  presented  to  the 
National  City  Bank  and  payment  demanded  on  the  ground 
that  the  bill  of  lading  in  question,  dated  October  12, 
evidenced  shipment  within  October  15.  At  the  trial  of 
the  action,  half  a  dozen  exporters  testified  that  it  was 
the  universal  custom  in  the  port  of  New  York  to  regard 
shipment  as  having  been  effected  when  the  merchandise 
is  delivered  to  a  dock  and  a  bill  of  lading  issued,  provid- 
ing for  its  eventual  transportation.  On  the  other  hand, 
a  steamship  operator  and  three  freight  forwarders,  called 
on  behalf  of  the  defendant,  testified  that  such  a  practice 
was  not  universal,  nor  commonly  recognized  by  merchants 
who  were  mindful  of  their  reputation.  As  the  jury 
found  for  the  defendant,  it  is  apparent  that  they  did  not 
regard  the  existence  of  the  custom  a?  having  been 
proved. 


XIO  AMERICAN  COMMERCIAL  CREDITS 

The  English  Cases  on  Bills  of  Lading 

More  recently  still  the  question  of  the  status  of  the 
received- for-shipment  bill  of  lading  has  come  up  for 
decision  before  English  courts,  with  varying  results.  In 
the  case  of  Marlborough  Hill  v.  Cowan  (1921,  i  App. 
Cas.  444)  it  was  held  by  Lord  Phillimore,  who  delivered 
the  judgment  of  the  Judicial  Committee  of  the  Privy 
Council,  that  there  could  be  no  difference  in  principle 
between  the  owner,  master,  or  agent  acknowledging  that 
he  had  received  the  goods  on  his  wharf  or  allotted  por- 
tion of  quay,  or  his  storehouse  awaiting  shipment,  and 
his  acknowledging  that  the  goods  had  been  actually  put 
over  the  ship's  rail.     Lord  Phillimore  said : 

The  two  forms  of  a  bill  of  lading  may  well  stand,  as  their 
Lordships  understand  that  they  stand,  together.  The  older  is 
still  in  the  more  appropriate  language  for  whole  cargoes  delivered 
and  taken  on  board  in  bulk;  whereas  "received  for  shipment"  is 
the  proper  phrase  for  the  practical  business-like  way  of  treating 
parcels  of  cargo  to  be  placed  on  a  general  ship  which  will  be 
lying  alongside  the  wharf  taking  in  cargo  for  several  days,  and 
whose  proper  stowage  will  require  that  certain  bulkier  or  heavier 
parcels  shall  be  placed  on  board  first,  while  others,  though  they 
have  arrived  earlier,  wait  for  the  convenient  place  and  time  of 
stowage.  Then  as  regards  the  obligation  to  carry  either  by  the 
named  ship  or  by  some  other  vessel;  it  is  a  contract  which  both 
parties  may  well  find  it  convenient  to  enter  into  and  accept.  The 
liberty  to  tranship  is  ancient  and  well  established,  and  does  not 
derogate  from  the  nature  of  a  bill  of  lading;  and  if  the  contract 
begins  when  the  goods  are  received  on  the  wharf,  substitution  does 
not  differ  in  principle  from  transhipment.  .  .  .  .Their  Lordships 
conclude  that  it  is  a  bill  of  lading  within  the  meaning  of  the 
Admiralty  Court  Act,  1861. 

There  the  matter  stood  until  July,  1921,  when  Mr. 
Justice  McCardie,  in  the  King's  Bench  Division  of  the 
High    Court    of    Justice,    decided    that    the    so-called 


THE  REGULATIONS  OF  1920  ill 

"received- for-shipment"  contract  of  carriage  was  a  mere 
receipt  for  goods  which  at  some  future  time,  and  by 
some  uncertain  vessel,  were  to  be  shipped,  and  that  it 
was  not  intended  to  be  termed  a  "bill  of  lading."  The 
action  was  brought  by  the  Diamond  Alkali  Export  Cor- 
poration against  F.  Bourgeois  of  London,  to  whom  the 
plaintiff  had  sold  by  written  contract  50  tons  of  soda 
ash.  The  terms  of  sale  called  for  "shipment  Septem- 
ber/October from  American  seaboard;  payment,  cash 
against  documents,  under  confirmed  banker's  credit  at 
London;  price  c.i.f.  Gothenburg."  The  contract  contained 
this  provision,  "date  of  bill  of  lading  is  to  be  considered 
date  of  shipment."  The  buyers  rejected  the  documents 
upon  the  grounds,  among  others,  that  a  proper  bill  of 
lading  and  a  proper  policy  of  insurance  were  not  pre- 
sented. 

Mr.  Justice  McCardie  in  giving  his  decision  referred 
to  Lord  Phillimore's  opinion  in  the  Marlborough  Hill 
case,  but,  as  a  Privy  Council  advice  was  not  binding  on 
the  King's  Bench  Division,  chose  to  disagree  with  it, 
and  particularly  with  the  portion  of  Lord  Phillimore's 
opinion  which  has  been  quoted.  On  this  point  Mr.  Jus- 
tice McCardie  said: 

With  the  deepest  respect  I  venture  to  think  that  there  is  a  great 
difference  between  the  two,  both  from  a  legal  and  business  point 
of  view.  Those  differences  seem  to  me  clear.  I  need  not  state 
them.  If  the  view  of  the  Privy  Council  is  carried  to  its  logical 
conclusion,  a  mere  receipt  for  goods  at  a  dock  warehouse  for 
shipment  might  well  be  called  a  bill  of  lading.  At  page  452  of  the 
Report  the  Board  say,  "Then  as  regards  the  obligation  to  carry 
either  by  the  named  ship  or  by  some  other  vessel,  it  is  a  contract 
which  both  parties  may  well  find  it  convenient  to  enter  into  and 
accept.  The  liberty  to  tranship  is  ancient  and  well  established, 
and  does  not  derogate  from  the  nature  of  a  bill  of  lading,  and  if 
the  contract  begin  when  the  goods  are  received  on  the  wharf, 


112  AMERICAN  COMMERCIAL  CREDITS 

substitution  does  not  differ  in  principle  from  transhipment."  I 
do  not  pause  to  analyse  these  words.  I  only  say  that  in  my  own 
humble  view  substitution  and  the  right  of  transhipment  are 
distinct  things  and  rest  on  different  principles.  The  passage  last 
cited  can,  I  think,  have  no  application  at  all  to  a  c.i.f.  contract 
which  provides  for  a  specific  date  of  shipment.  It  will  suffice  if 
I  say  two  things,  First,  that  in  my  view  the  "Marlborough  Hill" 
case  does  not  apply  to  a  c.i.f.  contract  such  as  that  now  before  me. 
Secondly,  that  grounds  for  challenging  the  dicta  of  the  Privy 
Council  will  be  found  in  Article  22  and  the  notes  and  cases  there 
cited,  in  Scrutton  &  Mackinnon,  lOth  Edition  as  to  what  are  called 
through  bills  of  lading,  in  the  lucid  article  in  the  Law  Quarterly 
Review  of  October  1889,  Vol.  5,  page  424,  by  Mr.  Bateson,  K.  C. ; 
and  of  July  1890,  Vol.  6,  page  289  by  the  late  Mr.  Carver,  and  in 
Carver  on  Carriage,  notes  to  Article  107.  I  do  not  doubt  that  the 
document  before  me  is  a  "shipping  document"  within  the  U,  S.  A. 
Harter  Act,  1893.  I  feel  bound  to  hold,  however,  that  it  is  not  a 
bill  of  lading  within  the  c.i.f.  contract  of  sale  made  between  the 
present  parties. 

In  the  same  judgment  Mr.  Justice  McCardie  over- 
ruled what  had  been  said  by  Mr.  Justice  Scrutton  in  his 
book  on  "Charter  Parties"  and  v^^hat  had  been  declared 
by  Mr.  Justice  Bailhache  in  Wilson  Holgate  and  Company 
(1920,  2  King's  Bench  Division)  by  holding  that  a  cer- 
tificate issued  by  an  insurance  company  incorporating 
the  terms  of  a  floating  policy  issued  by  that  company  to 
the  insured  could  not  be  tendered  as  the  equivalent  of  a 
policy  in  connection  with  a  c.i.f.  sale. 

The  British  Attempt  at  a  Solution 

So  far  as  our  own  export  commercial  credit  business 
was  concerned,  both  these  questions  had  been  adequately 
covered  by  the  Regulations  of  1920 — the  question  of  ship- 
ment by  the  provisions  already  referred  to,  and  the  ques- 
tion of  insurance  certificates  by  the  American  Foreign 
Trade  Definitions,  which  define  c.i.f.  documents  as  com- 


THE  REGULATIONS  OF  1920  113 

prehending  "insurance  policy  and/or  negotiable  insurance 
certificate."  These  regulations,  however,  afforded  no 
comfort  or  protection  to  the  British  banks  which  were 
negotiating  dollar  drafts  drawn  under  American  bankers' 
import  credits,  or  accepting  for  American  bankers  drafts 
drawn  under  sterling  credits.  American  bankers  had 
refrained  from  incorporating  the  regulations  in  their 
import  credits  for  fear  that  their  inclusion  would  render 
negotiation  of  drafts  more  difficult.  The  effect  of  exclu- 
sion was  quite  to  the  contrary. 

Far  Eastern  banks  had  felt  the  effects  of  the  uncer- 
tainty which  had  been  created  in  the  minds  of  merchants 
by  the  abuses  which  were  possible  in  connection  with 
the  received- for-shipment  bill  of  lading.  The  Foreign 
Exchange  Bankers  Association  in  Shanghai,  in  Novem- 
ber, 1920,  agreed  in  the  future  not  to  accept  received- 
for-shipment  bills  of  lading  in  connection  with  bills  of 
exchange  drawn  against  American  credits.  Even  prior 
to  that  time  the  exchange  banks  of  Batavia,  because  of 
the  reported  refusal  of  the  American  banks  to  recognize 
received-for-shipment  bills  of  lading,  had  bound  them- 
selves not  to  buy  after  September  i,  1920,  drafts  drawn 
against  such  letters  of  credit  unless  accompanied  by  the 
written  or  telegraphic  declaration  of  the  American  banks 
in  question,  showing  that  they  agreed  to  accept  received- 
for-shipment  bills  of  lading. 

This  action,  it  will  be  observed,  was  taken  simply  in 
connection  with  American  bank  credits,  which  were  there- 
by discriminated  against  in  favor  of  British  credits,  on 
the  assumption,  apparently,  that  the  British  merchants 
were  ready  to  accept  the  received-for-shipment  bill  of 
lading.  The  subsequent  British  litigation  which  has  been 
just  set  forth  indicates  the  fallacy  of  this  position.  British 
bankers  consequently  have  had  to  come  around  to  the 

8 


114  AMERICAN  COMMERCIAL  CREDITS 

position  which  New  York  bankers  took  in  1920,  by 
recognizing  the  fact  that  the  buyer  should  be  able  to 
indicate  which  sort  of  bill  of  lading  he  desires,  and  that 
the  seller  should  be  aflforded  an  opportunity  of  obtaining 
the  sort  that  the  buyer  has  indicated.  At  the  present 
time  the  British  Bankers  Association  has  reached  the 
opinion  that  the  use  of  the  shipping  document  known  as 
the  "received-for-shipment"  bill  of  lading,  and  like  docu- 
ments, have  become  in  many  cases  a  necessity  of  com- 
merce. They  have  consequently  recommended  that  the 
interests  concerned  co-operate  to  remove  the  difficulties 
which  at  present  attend  the  use  of  such  documents  in 
the  cases  in  which  their  need  is  generally  recognized. 

How  this  co-operation  is  to  be  attained  has  not  yet 
been  determined.  It  has  been  proposed  that  the  solution 
follow  the  plan  which  was  adopted  in  connection  with 
the  Liverpool  Bill  of  Lading  Conference  Committee, 
which  produced  regularity  in  the  handling  of  cotton  ship- 
ments by  sanctioning  and  defining  custody  and  port  as 
well  as  ship  bills  of  lading.  It  has  been  proposed  that 
two  classes  of  bills  of  lading  be  established:  first,  a 
"shipped"  bill  of  lading,  which  would  be  an  absolute 
guaranty  of  shipment  in  the  named  steamer,  and,  second, 
a  received-for-shipment  bill  of  lading,  which  would  be  a 
guaranty:  (i)  that  the  goods  named  had  irrevocably 
passed  out  of  the  shipper's  control  and  were  entirely  at 
the  disposal  of  the  carrier,  and  (2)  that  the  named 
steamer  was  expected  to  be  either  in  the  port  ready  to 
commence  loading  or  to  complete  loading,  and  to  sail  from 
the  port  within  an  agreed  number  of  days  from  the  date 
of  the  bill  of  lading.  It  seems  that  a  more  practicable 
solution  could  be  accomplished  by  limiting  the  use  of  the 
received-for-shipment  bill  of  lading  to  carriers  of  un- 
doubted responsibility,  with  adequate  facilities  for  recelv- 


THE  REGULATIONS  OF  1920  iiS 

ing  and  warehousing  the  merchandise  pending  shipment., 
and  operating  regular  sailings  over  established  routes  with 
sufficient  frequency  to  insure  freedom  from  undue  delay. 
It  seems  at  the  present  time  to  have  escaped  the  atten- 
tion of  British  and  Far  Eastern  bankers  that  there  is  a 
difference  between  the  shipped  bill  of  lading  they  are  at 
present  demanding  and  the  bill  of  lading  with  an  on- 
board indorsement,  which  is  obtained  upon  request  in 
American  ports.  The  Amercian  indorsement  actually 
evidences  a  receipt  of  the  merchandise  on  board  the 
vessel  named,  while  the  so-called  "shipped"  bill  of  lading, 
which  is  now  in  use  by  the  British  lines  operating  in  the 
Far  East,  is  actually  nothing  but  a  received-for-shipment 
bill  of  lading  under  another  name  and  affords  the  buyer 
no  more  protection  than  formerly.  The  typical  language 
of  a  received-for-shipment  bill  of  lading  reads  as  follows: 
"Received  in  apparent  good  order  and  condition  for  ship- 
ment on  board  the  steamer with  liberty  to  sub- 
stitute any  other  or  succeeding  steamer."  At  the  present 
time  it  is  the  practice  to  convert  such  a  bill  of  lading  into 
a  shipped  bill  of  lading  by  striking  out  "received  for 
shipment"  and  inserting  the  word  "shipped,"  leaving,  how- 
ever, the  liberty  of  substitution.  Consequently,  while 
American  banks  have  on  export  credits  been  freed  from 
risk  or  controversy  in  connection  with  the  question  since 
1920,  the  total  effect  of  the  British  efforts,  through 
litigation  and  bank  action,  has  been  to  heighten  rather 
than  to  lessen  the  confusion  in  Great  Britain. 

Lack  of  Uniform  Contract  of  Carriage 

The  principal  function  of  a  bill  of  lading,  as  between 
shipper  and  carrier,  is  to  serve  as  a  contract  of  carriage, 
and  as  such  its  terms  are  of  interest  simply  to  the  con- 
tracting parties.    When,  however,  a  bill  of  lading  comes 


Ii6  AMERICAN  COMMERCIAL  CREDITS 

to  be  used  as  an  instrument  of  credit,  furnishing  docu- 
mentary evidence  of  the  shipment  of  goods  from  seller 
to  buyer,  and  purporting  to  vest  control  of  the  mer- 
chandise in  the  hands  of  the  holder  of  the  bill  of  lading, 
it  takes  on  a  public  character.  It  must  be  safeguarded 
against  fraud  and  standardized,  so  that  each  bill  of  lading 
presented  to  a  banker  as  security  need  not  be  minutely 
analyzed  to  ascertain  its  legal  sufficiency.  The  bills  of 
lading  issued  by  our  rail  carriers  in  interstate  commerce 
have  attained  this  desirable  status  and  have  become  readily 
adaptable  to  large-scale  banking  operations.  This  situa- 
tion did  not  result  naturally,  but  was  brought  about 
through  the  continuous  efforts  of  the  American  Bankers 
Association.  At  the  present  time  it  is  not  necessary  for 
a  banker  to  examine  a  railroad  bill  of  lading  because  the 
Interstate  Commerce  Commission  has  prescribed  the  form 
uniformly  employed  by  every  carrier,  while  the  Federal 
Bill  of  Lading  Act  defines  the  kinds  of  bills  of  lading 
which  may  be  issued  and  fixes  their  legal  eflfect. 

Our  commerce  is  international  as  well  as  interstate, 
and  it  is  quite  as  important  to  the  commercial  as  well  as 
to  the  banking  community  that  this  standardization  should 
be  effected  in  the  bills  of  lading  employed  in  foreign 
commerce.  However,  the  situation  with  regard  to  ocean 
bills  of  lading  is  today  as  chaotic  as  that  which  existed 
with  regard  to  railroad  bills  of  lading  at  the  time  when 
pressure  was  exerted  which  has  resulted  in  the  clarifica- 
tion of  the  domestic  situation.  The  only  uniformity 
reached  by  ocean  bills  of  lading  at  the  present  time  is  a 
rough  sort  of  uniformity  of  non-responsibility  which  has 
been  accomplished  as  a  result  of  each  line  having  adopted 
any  liability-waiving  clause  that  has  been  worked  out  by 
counsel  for  their  competitors  and  inserted  in  their  bills 
of  lading.    While  up  to  the  present  time,  out  of  all  the 


THE  REGULATIONS  OF  1920  ii? 

plans  drawn  up  by  committees  and  conferences  which 
have  been  called  to  discuss  the  adoption  of  uniform  ocean 
bills  of  lading,  nothing  which  promises  the  hope  of  an 
immediate  solution  of  the  problem  has  resulted,  there  is 
under  way  an  international  movement  which,  if  success- 
ful, should  form  the  prelude  to  complete  uniformity.  At 
a  meeting  of  the  International  Law  Association  at  The 
Hague  on  September  3,  192 1,  an  international  code,  defin- 
ing the  risk  to  be  assumed  by  sea  carriers  under  a  bill  of 
lading,  was  adopted.  This  code  has  already  been  adopted 
by  the  British  Bankers  Association,  which  agreed  to 
make  them  effective  in  relation  to  all  transactions  originat- 
ing after  January  31,  1922.  It  is  likely  that  similar  action 
will  be  taken  by  the  American  Bankers  Association. 
Such  opposition  as  has  developed  has  been  directed  to 
what  are  after  all  secondary  considerations.  The  pre- 
cise form  of  a  carrier's  bill  of  lading  or  the  precise  point 
at  which  the  carrier^s  liability  ceases  and  the  cargo  under- 
writer's begins,  is  not  the  important  question.  The  vital 
thing  is  that  obligations  and  forms  should  be  uniform. 
Then,  and  then  only  can  all  parties  protect  themselves 
intelligently,  and  the  party  who  accepts  a  known  risk 
can  always  cover  himself  by  insurance,  and  double  insur- 
ance can  be  avoided.  It  seems  advisable,  therefore,  that 
the  principle  of  uniformity  as  put  into  effect  by  The 
Hague  Rules,  192 1,  should  have  universal  approval,  and 
if  necessary  the  question  of  the  precise  adjustment  of 
the  division  of  responsibility  effected  thereunder  should 
be  left  to  subsequent  negotiation. 


f 


.; 


CHAPTER  VIII 

RECOGNITION  OF  THE  NEED  FOR  STANDARD 
FORMS 

The  Beginning  of  the  Movement 

While  it  was  the  favorable  reception  given  to  the 
Regulations  of  1920,  because  of  the  protection  they 
afforded  all  parties  concerned,  which  encouraged  the 
thought  that  complete  standardization  of  commercial 
letter  of  credit  forms  might  be  accomplished  by  unified 
action  on  the  part  of  bankers  who  dealt  with  the  device, 
the  advantages  to  be  gained  from  such  a  course  had 
previously  been  set  forth  by  merchants.  The  Bankers 
Magazine  of  August,  1917,  contains  an  article  by  J.  P. 
Beal,  of  the  American  Steel  Export  Company,  which 
bears  the  title,  "Utility  of  Letters  of  Credit  in  the  Export 
Trade — a  Plea  for  Standard  Forms."  Mr.  Beal  said, 
in  part: 

When  the  letter  of  credit  has  been  established  the  exporter  is 
then  desirous  of  knowing  that  the  terms  of  it  are  such  as  to  give 
him  adequate  protection.  In  this  regard  it  is  interesting  to  note 
the  many  different  forms  used  by  the  various  banks;  they  all 
seem  to  be  different  in  some  respects.  Some  banks  merely  write 
an  explanatory  letter  on  their  regular  letterheads,  while  others 
have  forms  set  up  on  which  to  record  the  various  points  in  re- 
lation to  the  terms  of  the  credit.  When  one  considers  the  vast 
number  of  these  daily  transactions  by  all  the  banks  having  foreign 
departments  or  foreign  correspondents  of  any  importance  it  would 
only  seem  natural  that  some  concerted  action  be  taken  by  the 
banks  to  standardize,  as  much  as  possible,  the  forms  for  reporting 
letters  of  credit.  Checks,  drafts  and  notes  have  been  standardized 
on  uniform  lines— why  not  letters  of  credit?     The  uniform  bills 

118 


THE  NEED  FOR  STANDARD  FORMS  iiQ 

of  lading  adopted  by  the  railroads  of  the  country  have  materially 
assisted  both  the  shippers  and  the  carriers  in  a  more  thorough 
understanding  of  the  conditions  and  protection  afforded  to 
each. 

There  are  always  certain  points  in  regard  to  a  letter  of  credit 
about  which  the  export  merchant  is  vitally  concerned,  and  if  the 
letter  from  the  bank  does  not  clearly  specify  some  of  these  it 
means  correspondence  between  the  two  to  clarify  the  point  in 
question.  This  correspondence  takes  a  considerable  amount  of 
time  both  of  the  merchant  and  the  force  of  the  bank.  A  great 
portion  of  it  might  be  eliminated  with  an  increase  of  efficiency 
and  reduction  of  expense  to  both.  Would  these  points  not  usually 
be  more  fully  and  clearly  stated — and  be  more  susceptible  of 
proper  interpretation,  if  standard  forms  were  adopted? 

The  first  eflfective  work  towards  the  accomplishment 
of  this  end  was  performed  by  Omer  F.  Hershey,  a 
member  of  the  Baltimore  bar  and  general  counsel  for  the 
American  Steel  Export  Company,  who  wrote  for  the 
Harvard  Law  Review  of  November,  1918,  a  thoughtful 
analysis  of  all  the  body  of  law  then  extant  on  the  sujpject 
of  letters  of  credit,  in  order  to  find  the  legal  basis  upon 
which  standardization  could  be  built.  After  examining 
various  conceptions  with  regard  to  letters  of  credit  which 
have  been  suggested  in  certain  court  decisions,  Mr.  Her- 
shey reached  this  conclusion: 

But  all  the  requirements  of  the  situation  are  met  and  on  the 
whole  are  better  met  by  treating  the  letter  of  credit  as  a  self-suf- 
ficing instrument  of  the  law  merchant.  In  the  end  nothing  will 
do  so  well  as  a  frank  and  full  recognition  by  law  of  the  universal 
understanding  of  the  commercial  world.  To  bring  this  about, 
bankers  should  agree  on  a  simple,  uniform  letter,  and  the  courts 
should  give  effect  to  it  for  what  it  is  intended  to  be.  Perhaps  the 
timid,  not  to  say  false,  conservatism  of  the  courts  may  compel 
business  men  to  turn  to  the  Commissioners  on  Uniform  State 
Laws  and  invoke  the  aid  of  the  legislator.  But  legislation  cannot 
come  in  time  to  take  care  of  the  litigation  that  is  almost  certain 


I20  AMERICAN  COMMERCIAL  CREDITS 

to  flow  presently  from  the  enormous  volume  of  business  done  un- 
der these  letters  in  the  last  four  years.  The  courts  may,  if  they 
will,  do  all  that  is  needed ;  for,  I  repeat,  it  is  a  false  conservatism 
that  stands  in  their  way.  Courts  are  properly  cautious  in  abandon- 
ing rules  or  doctrines,  since  to  do  so  may  endanger  the  stability  of 
our  economic  order  by  disturbing  the  transactions  of  the  past  and 
unsettling  acquisitions;  but  there  is  nothing  truly  conservative  in 
adhering  to  conditions  of  uncertainty  in  the  laws  governing 
commerce,  or  in  defeating  or  unsettling  business  transactions, 
carried  on  in  large  volume,  by  insisting  on  applying  to  them 
doctrines  or  theories  developed  for  earlier  and  different  condi- 
tions of  trade,  or  in  disturbing  credit  by  making  it  uncertain 
whether  the  deliberate  promises  of  business  men  made  in  the 
course  of  business  as  business  transactions,  and  in  practice 
relied  upon  with  confidence  in  the  every  day  course  of  our  com- 
merce, are  to  be  legally  enforceable.  In  the  words  of  Cockburn, 
C  J., 

"Why  is  the  door  to  be  now  shut  to  the  admission  and  adoption 
of  (commercial)  usage,  as  though  the  law  had  been  formally 
stereotyped  and  settled  by  some  positive  and  peremptory  enact- 
ment? ....  Why  is  it  to  be  said  that  a  new  usage  which  had 
sprung  up  under  altered  circumstances,  is  to  be  less  admissible  than 
the  iJsages  of  past  time?" 

Let  us  hope  that  New  York,  where  most  of  these  questions  are 
likely  to  rise,  will  prove  capable  of  finding  another  Kent  upon  her 
bench  in  this  twentieth  century — when  her  commercial  interests 
and  the  commercial  development  of  the  country  at  large  call  for 
him  no  less  than  did  the  opening  years  of  the  nineteenth  century. 
Lord  Mansfield  sought  to  establish  a  doctrine  that  no  promise  in 
writing  made  by  a  business  man  in  the  course  of  business  could 
be  held  nudum  pactum.  Is  it  not  time  that  business  transactions 
in  our  law  should  stand  as  such  and  be  entitled  to  legal  protection 
because  they  are  such,  without  the  necessity  of  continually  giving 
them  artificial  forms  in  order  to  comply  with  historical  require- 
ments of  consideration,  and  without  the  risk  that  they  will  fail 
because  business  has  chosen  to  grow  along  its  own  lines  instead 
of  hewing  eternally  to  some  fixed  line  of  common-law  doctrine 
or  tradition?  Commerce  is  able  to  function  safely  on  the  theory 
that  "a  business  man's  word  is  as  good  as  his  bond."  Our  courts 
can  afford  to  make  this  plain  theory  of  business  an  effective 
theory  of  law. 


THE  NEED  FOR  STANDARD  FORMS  121 

• 

This  article  was  reprinted  by  the  American  Steel 
Export  Company  and  distributed  with  the  following  note 
signed  by  Howard  W.  McAteer,  its  president: 

The  American  Steel  Export  Company  takes  the  liberty  of  call- 
ing your  attention  to  the  following  article  on  "Letters  of  Credit" 
from  the  Harvard  Law  Review.  Our  Company,  particularly  since 
the  beginning  of  the  war,  has  used  such  letters  to  the  extent  of 
many  milHons  of  dollars,  but  often  with  some  hesitancy  and  un- 
certainty as  to  our  legal  and  practical  position  under  given  con- 
tingencies. In  fact  the  article  here  called  to  your  attention  is 
really  the  outgrowth  or  elaboration  of  opinions  given  our  Com- 
pany from  time  to  time  on  its  own  Letters  of  Credit  problems,  by 
Mr.  Hershey,  our  General  Counsel ;  and  while  the  paper  is  rather 
technical  and  intended  for  lawyers  only,  nevertheless  some  parts 
of  it  will  be  of  interest  I  think  to  you,  as  bringing  out  the  desir- 
ability of  having  our  financial  houses  adopt  a  more  simple  standard 
form  of  Letter  that  meets  the  legal  requirements  and  at  the  same 
time  is  satisfactory  to  business.  Mr.  Hershey  shows  up  the  chaotic 
and  uncertain  state  of  the  law  on  the  subject  and  argues  that  the 
courts  should  treat  a  letter  of  credit  so  as  to  give  effect  to  what 
business  intends  and  means  and  understands  by  it.  To  ask  the. 
courts  to  do  what  seems  to  me  to  be  so  obviously  proper,  pre- 
supposes that  business  men  and  banks  have  done  their  part  to 
simplify  and  standardize  these  documents  and  to  make  sure  that 
they  themselves  always  know  what  is  intended  by  them.  Our 
experience  is  that  at  present  hardly  two  institutions  issue  the  same 
form  of  letter.  Some  differ  in  form  only,  others  in  legal  sub- 
stance also.  The  result  is  just  the  sort  of  confusion  and  un- 
certainty this  article  points  out.  None  of  us  know  to  what  extent 
the  present  use  of  these  letters  may  continue,  but  I  think  they 
might  well  be  of  service  in  our  post  war  overseas  business,  if  their 
position,  both  legally  and  practically,  could  be  more  clearly 
established;  and  I  trust  this  discussion  of  one  phase  of  the  subject 
may  be  of  interest  to  you. 

In  the  spring  of  1920  the  subject  engaged  the  atten- 
tion of  Marc  M.  Michael,  Treasurer  of  the  Consolidated 
Steel  Corporation,  who  sought,  unsuccessfully,  to  have 


122  AMERICAN  COMMERCIAL  CREDITS 

• 
the  New  York  Bankers  Commercial  Credit  Conference 

consider  it  at  that  time  and  brought  it  before  the  Seventh 
Annual  Foreign  Trade  Convention  held  that  year  in  San 
Francisco. 

Survey  Made  by  Federal  Reserve  Board 

In  the  fall  of  1920,  Dr.  H.  Parker  Willis,  Director 
of  the  Division  of  Analysis  and  Research  of  the  Federal 
Reserve  Board,  assigned  his  assistant,  Dr.  George  W. 
Edwards,  to  co-operate  with  the  New  York  Bankers 
Commercial  Credit  Conference  in  carrying  forward  the 
work  in  which  the  bankers  had  made  a  promising  begin- 
ning by  their  regulations  of  that  year.  Dr.  Edwards 
laid  the  groundwork  for  a  scientific  study  of  the  subject 
by  making  a  survey  of  the  forms  and  practices  of  Amer- 
ican banks,  and  by  obtaining  expressions  of  opinion  from 
American  exporters  and  importers  on  the  controversial 
problems  relating  to  the  technique  of  letters  of  credit. 
The  results  of  these  exhaustive  studies  have  appeared  in 
the  Federal  Reserve  Bulletins  during  1921  and  have  been 
reprinted  in  convenient  pamphlet  form  by  the  American 
Acceptance  Council  ("Commercial  Credit  Instruments 
and  Practice  in  Financing  Foreign  Trade,"  by  George  W. 
Edwards,  Ph.D.).  The  data  thus  secured  served  as  the 
basis  of  the  uniform  credit  instruments  which  were 
eventually  adopted. 

Enlargement  of  the  Conference 

As  at  this  time  the  subject  had  ceased  to  become  a 
matter  of  local  interest,  it  was  found  advisable  to  enlarge 
the  membership  of  the  bankers'  committee  by  the  addi- 
tion of  representatives  from  Chicago  and  New  Orleans 
banks.  To  give  it  broader  support  and  a  continued 
existence,  the  activities  of  the  conference  were,  through 


THE  NEED  FOR  STANDARD  FORMS  123 

the  friendly  offices  of  Paul  M.  Warburg,  put  into  co- 
ordination with  the  activities  of  the  American  Acceptance 
Council,  which  has  undertaken  to  carry  on  the  work. 

Co-operation   Between   Mercantile   and   Banking   In- 
terests 

While  the  bankers  were  making  these  preparations 
for  the  work  of  standardizing  the  forms,  various  mercan- 
tile associations  had  independently  arrived  at  the  feeling 
that  standardization  should  be  attempted,  and  had  formed 
committees  for  that  purpose.  After  informal  discussion 
between  these  committees,  it  was  determined  that  the 
work  of  analyzing  the  material  obtained  by  Dr.  Edwards 
and  drafting  proposed  forms  should  be  done  in  the  first 
instance  by  a  subcommittee  of  the  American  Bankers 
Commercial  Credit  Conference.  This  committee,  under 
the  leadership  of  E.  H.  Kuhlman,  an  assistant  manager 
of  the  foreign  department  of  the  Mechanics  and  Metals 
National  Bank,  drafted  forms  which,  after  consideration 
by  the  Commercial  Credit  Conference,  were  submitted 
in  June,  192 1,  to  a  joint  meeting  of  the  committees  repre- 
senting the  various  bodies  interested. 

First  Joint  Conference 

The  attendance  at  this  joint  meeting  was  as  follows : 

Wilfred  S.  Cousins      representing  American       Acceptance 

Council. 

Wm.  H.  Knox  "  National  Foreign  Trade 

Council. 

A.  W.  Willmann  "  American     Manufactur- 

ers Export  Associa- 
tion. 

W.  H.  Douglas  "  American         Exporters 

and  Importers  Asso- 
ciation. 


124  AMERICAN  COMMERCIAL  CREDITS 

Howard  Ay  res  representing  Chamber  of   Commerce 

of  the  State  of  New 
York. 

C  A.  Richards  "  Merchants     Association 

of  New  York. 

Marc  M.  Michael  "  National  Association  of 

Credit  Men. 

F.  Hartman  "  Irving  National  Bank. 

C.  C.  McCauley  "  First  National  Bank  of 

Boston. 

R.  M.  Saunders  "  Guaranty    Trust    Com- 

pany. 

Wilbert  Ward  "  National   City  Bank  of 

New  York. 

Dr.  Geo.  W.  Edwards  "  Federal   Reserve  Board 

— Division  of  Analy- 
sis and  Research. 

Bearing  in  mind  the  basic  proposition  that  the  proper 
function  of  a  commercial  credit  is  to  finance  the  trans- 
action and  not  to  serve  as  a  check  on  the  proper  execution 
of  the  terms  of  the  contract  of  sale,  the  joint  conference 
examined  the  proposed  forms,  in  which  the  rules  adopted 
by  the  conference  in  1920  had  been  incorporated,  with 
the  object  of  eliminating  as  many  rules  and  limitations  as 
possible.  Such  rules  as  were  retained  in  the  forms 
recommended  by  this  conference  remained  simply  because 
the  commercial  practice  on  the  points  involved  had  not 
as  yet  been  clarified.  It  was  pointed  out  that  even  in 
such  cases  the  rules  were  intended  to  apply  only  where 
the  absence  of  specific  instructions  would  otherwise  leave 
the  points  in  question  open  to  interpretation.  It  was 
recommended  that  commercial  bodies  here  and  abroad 
address  themselves  immediately  to  the  adoption  of  a  uni- 
form and  generally  recognized  custom  with  reference  to 
the  matters  which  remained  the  subject  of  regulations., 
so  that  commercial  credit  instruments  might  in  this  fashion 


THE  NEED  FOR  STANDARD  FORMS  125 

be    freed   entirely    from   the   necessity   of    incorporating 
rules  for  their  interpretation. 

The  Demand  for  a  Single  Type  of  Credit 

While  there  was  agreement  between  the  merchants 
and  the  bankers,  therefore,  as  to  the  fundamental  pur- 
pose of  the  credit  device,  there  was  from  the  outset  some 
division  of  opinion  concerning  the  form  the  instruments 
should  take.  The  interest  which  our  merchants  were 
giving  the  subject  had  been  stimulated  by  the  experiences 
they  had  undergone,  in  the  spring  of  1920,  in  connection 
with  the  dramatic  collapse  of  our  export  trade.  The 
mercantile  organizations,  export  houses,  and  manufac- 
turers who  were  now  in  search  of  a  satisfactory  bankers' 
credit,  were  frankly  in  pursuit  of  an  instrument  which 
would  assure  them  protection  against  another  wave  of 
cancellation.  They  possessed  ample  financial  strength  to 
assemble  merchandise  and  to  finance  it  themselves  through 
the  period  of  overseas  transit  to  the  buyer,  if  they  were 
satisfied  of  the  credit  risk.  However  useful  a  credit 
which  took  this  burden  of  overseas  finance  off  the  seller's 
shoulders  might  be  to  others,  it  was  valueless  in  their 
eyes  unless  there  was  coupled  with  it  an  irrevocable  com- 
mitment, preferably  by  an  American  bank,  to  honor  their 
drafts  if  presented  within  a  stipulated  time.  Feeling  on 
this  point  was  so  strong  that  some  of  our  merchants  were 
unwilling  to  concede  that  a  credit  instrument  might  fail 
to  achieve  the  object  they  sought  and  yet  be  useful  to 
others  who  sought  another  purpose.  They  sought,  in- 
stead, to  persuade  American  bankers  to  decline  to  issue 
any  other  instrument  than  the  one  they  sought,  so  that 
foreign  buyers  and  foreign  banks  would  be  unable  to 
tender  any  other.  Such  a  course  on  the  part  of  Amer- 
ican  bankers   would   not   be   justified   unless   the   forms 


126  AMERICAN  COMMERCIAL  CREDITS 

which  were  to  be  thrown  into  the  discard  were  useless 
for  any  purpose  whatsoever.  It  is  worth  while,  there- 
fore, to  consider  again  for  a  moment  the  purposes  a 
commercial  letter  of  credit  may  accomplish,  and  con- 
trast these  purposes  with  the  reasons  which  actuated  our 
merchants  in  seeking  credits.  It  is  only  by  contrasting 
the  purposes  they  sought  to  achieve  with  the  instruments 
offered  to  them  that  some  estimate  can  be  made  of  the 
extent  to  which  the  demand  for  a  single  type  of  credit 
was  justified. 

Protection 

At  the  time  the  commercial  letter  of  credit  came  into 
general  use  in  this  country *s  export  trade,  the  world's 
political  and  economic  situation  was  shifting  so  rapidly 
that  reliance  could  not  be  placed  on  ordinary  credit 
sources.  Merchants  abroad  were  solvent  one  day  and 
bankrupt  the  next,  often  through  causes  beyond  their 
control.  Those  of  our  manufacturers,  export  merchants, 
and  export  commission  houses,  who  had  at  their  disposal 
sufficient  capital  and  banking  credit  to  extend  terms  to 
their  foreign  buyers,  found  their  credit  managers  increas- 
ingly reluctant  to  approve  the  risk.  They  were  also  being 
approached  by  a  flood  of  new  customers  whose  right  to 
request  credit  had  not  been  demonstrated  in  previous 
dealings.  In  seeking  commercial  letters  of  credit  these 
merchants  were  actuated  by  a  desire  to  protect  the  credit 
risk.  They  sought  the  commercial  credit,  therefore,  to 
relieve  themselves  of  the  necessity  of  extending  credit 
to  the  buyer. 

Aid  in  Financing 

Prior  to  19 14  the  bulk  of  the  foreign  trade  was  done 
by  less  than  a  dozen  export  merchants  and  commission 


THE  NEED  FOR  STANDARD  FORMS  127 

houses.  By  1919  there  were  over  1,800  such  houses 
operating  in  New  York  City  alone.  Few  of  the  new- 
comers had  capital;  some  had  experience;  many  lacked 
both.  These  houses  in  the  main  had  extremely  limited 
resources  for  the  financing  of  the  business  which  was 
offered  them.  They  could  assemble  merchandise  and 
ship  it,  but  at  that  point  they  had  to  arrange  for  the  pay- 
ment, not  only  of  the  goods  to  their  domestic  suppliers, 
but  of  the  freight  rates,  and  insurance  premiums.  It 
made  little  difference  to  these  houses  whether  the  buyer's 
credit  risk  was  good  or  bad.  The  only  basis  on  which 
they  could  do  business  was  "cash  against  documents  New 
York."  They  sought  credits,  therefore,  for  another  legiti- 
mate reason — to  place  themselves  in  funds  during  the 
period  in  which  the  merchandise  was  in  transit. 

More  Moderate  Counsels  Prevail 

There  were  American  merchants  who  sought  only  pro- 
tection and  the  types  of  credit  which  afforded  it,  and 
who,  while  they  appreciated  the  limitations  of  other 
forms  of  credit,  were  not  only  willing  to  concede  their 
suitability  to  the  purpose  of  other  merchants,  but  to  admit 
that  they  would  at  times  rather  have  them  than  no  credit 
at  all,  when  that  was  the  alternative  the  buyer  offered. 
The  American  banks  had  never  entertained  the  idea  that 
standardization  would  be  attained  by  dictating  to  foreign 
banks  the  sort  of  instrument  they  must  employ  in  this 
market.  Their  plan,  from  the  outset,  had  been  to  analyze 
existing  forms  and  see  to  what  small  compass  they  could 
be  compressed  without  losing  flexibility.  An  equally 
great  eifort  was  made  to  clarify  and  define  beyond  the 
possibility  of  misunderstanding  the  exact  function  of  the 
forms  adopted  as  the  result  of  this  analysis.  These  forms 
continue  to  give  the  buyer  and  the  issuing  bank  liberty 


128  AMERICAN  COMMERCIAL  CREDITS 

to  offer  the  seller  varying  degrees  of  security.  By  clarify- 
ing the  exact  obligation  assumed  by  the  several  parties 
concerned,  these  forms  enable  the  seller  to  understand 
exactly  the  nature  of  the  security  he  is  offered,  and 
thus  to  determine  whether  or  not  it  is  acceptable. 


CHAPTER  IX 

THE  RIGHT  TO  REVOKE 

Does  the  Right  to  Revoke  Exist? 

After  it  had  been  conceded  by  American  merchants 
that  the  movement  for  the  unification  of  commercial 
letter  of  credit  forms  and  practices  should  include  a 
credit  which  did  not  afford  protection  against  cancella- 
tion, it  was  still  necessary,  before  the  work  of  drafting 
forms  could  begin,  to  determine  upon  a  policy  to  be 
pursued  with  reference  to  giving  notice  of  cancellation. 
To  fix  upon  this  policy  it  was  necessary  to  give  con- 
sideration to  what  appeared  to  be  the  most  disputed 
and  least  understood  of  all  the  attendant  problems — that 
of  the  exercise  of  the  right  to  revoke.  About  this  ques- 
tion of  the  right  to  revoke  or  cancel — the  terms  are  used 
synonymously — there  has  been  more  loose  thinking  and 
more  unjustified  confusion  than  on  any  other  point  in 
commercial  practice. 

The  case  against  the  right  to  revoke  had  its  most 
extreme  expression  in  a  circular  dispatched  by  a  New 
York  bank  to  its  correspondents  during  the  early  years 
of  the  war,  when  American  banks  were  doing  commercial 
credit  business  first  and  learning  how  to  do  it  afterward. 
The  circular  said: 

In  the  case  of  an  unconfirmed,  or  revocable  credit,  a  liability 
exists  notwithstanding  the  fact  that  it  has  not  been  confirmed; 
and  this  liability  covers  the  ground  that,  after  receipt  of  advice  of 
the  issuance  of  the  credit,  notwithstanding  the  fact  that  emphasis 
is  laid  upon  the  circumstance  that  the  credit  is  not  a  confirmed  one, 
9  '  129 


I30  AMERICAN  COMMERCIAL  CREDITS 

any  action,  no  matter  how  slight,  on  the  part  of  the  beneficiary 
puts  the  obligation  upon  the  bank  to  pay  the  amount  of  his 
invoices. 

American  Banking  Opinion  Divided 

One  of  the  inquiries  made  of  American  banks  last 
spring  by  the  very  useful  questionnaire  devised  by  Dr. 
Edwards  of  the  Division  of  Analysis  and  Research  of 
the  Federal  Reserve  Board,  was  this: 

When  you  are  asked  to  cancel  an  unconfirmed  credit,  is  the 

maximum  time  limit  within  which  you  may  cancel  set  by 

Delivery  of  goods  at  pier  by  exporter  ? 
Drawing  of  drafts  by  exporter? 
Negotiation  of  drafts  by  your  bank? 
Receiving  of  documents  by  your  bank? 

Dr.  Edwards'  analysis  of  the  answers  received  is  as 
follows : 

Delivery  of  goods, 
Drawing  of  drafts, 
Negotiation  of  drafts, 
Receiving  of  documents, 

(a)  If  a  seller  had  manufactured  goods  of  a  special  kind  in 
good  faith  on  the  strength  of  the  credit,  we  doubt  whether  it 
could  be  cancelled  and  we  believe  the  same  condition  would  apply 
if  an  importer  had  purchased  special  lines  of  merchandise  for 
export. 

(b)  All  credits  usially  state  conditions  of  expiration.  If 
authority  provides  that  shipment  must  be  made  by  date,  we  con- 
sider that  a  regular  bill  of  lading  of  a  public  carrier  evidences 
time  of  shipment. 

(c)  We  have  always  considered  that  we  have  the  right  to 
cancel  an  unconfirmed  credit  by  giving  notice  to  the  beneficiary  in 
writing  at  any  time  before  presentation  of  the  documents  to  our 
bank. 

(d)  An  unconfirmed  or  revocable  credit  can  be  cancelled  at 
any  time  by  the  party  who  had  established  it,  providing  that  such 


Yes,    3; 

No,  41. 

Yes,    i; 

No,  41. 

Yes,  29; 

No,  IS. 

Yes,  18; 

No,  25. 

THE  RIGHT  TO  REVOKE  131 

cancellation  or  revocation  notice  reaches  the  negotiating  bank  prior 
to  the  actual  negotiation.  Once,  however,  a  bank  has  negotiated 
in  good  faith  a  draft  drawn  under  an  unconfirmed  credit,  the 
bank  which  established  the  credit  must  protect  the  negotiating 
bank. 

(e)  A  revocable  credit  is  subject  to  cancellation  until  the 
drafts  are  actually  paid  abroad  regardless  of  time  of  negotiation. 

It  is  a  recognized  principle  that  an  unconfirmed  credit  may  be 
cancelled  by  an  advising  bank,  but  the  maximum  time  limit  within 
which  this  right  may  be  exercised  is  subject  to  various  interpreta- 
tions. As  shown  by  the  above  answers  the  exact  time  may  be 
fixed  as  follows: 

(a)  Completion  of  manufacture,  particularly  of  special  goods. 

(b)  Delivery  of  goods  to  a  carrier  as  evidenced  by  a  bill  of 
lading. 

(c)  Presentation  of  documents  to  the  bank. 

(d)  Negotiation  of  drafts  by  the  notifying  bank. 

(e)  Payment  of  drafts  by  the  credit-issuing  bank  abroad. 

The  more  liberal  policies  expressed  in  answers  (a),  (b),  and 
(c)  are  followed  by  only  a  few  banks,  for  the  majority  claim  the 
right  to  nullify  the  credit  at  any  time  prior  to  the  moment  the 
drafts  are  paid — (d).  Some  even  insist  that  the  entire  credit  may 
be  rescinded  up  to  the  time  of  negotiation  by  the  original  credit- 
issuing  bank  (e).  A  few  contend  that  they  may  avail  themselves 
of  the  power  to  cancel  an  unconfirmed  credit  at  any  time,  without 
even  notifying  the  beneficiary  of  such  action. 

The  English  View  on  Revocation 

Mr.  Spalding  in  his  book  on  the  English  practice 
records  that  there  is  a  "difference  of  opinion"  about  the 
right  to  cancel  a  bankers'  credit.    He  also  says: 

Needless  to  say,  there  is  considerable  controversy  about  the 
precise  reliance  to  be  placed  on  an  unconfirmed  credit,  and  bankers 
hold  that  the  value  of  such  a  credit  is  that  it  is  valid  until  can- 
celled; but  the  bank  has  the  right  to  cancel  it  whether  the  bene- 
ficiary agrees  or  not.  Possibly  the  acceptance  by  the  exporter  of 
such  terms  as  are  found  in  the  credit  would  be  taken  in  law  to  be 
sufficient  notice  that  in  drawing  his  bills  he  had  no  assurance  that 


132  AMERICAN  COMMERCIAL  CREDITS 

they  would  be  accepted  by  the  bankers  upon  whom  they  are  drawn ; 
but  if  there  were  the  slightest  implication  that  the  bank  had 
given  any  sort  of  guarantee  to  accept  and  had  not  reserved  to 
itself  the  power  of  revocation,  the  Courts  would  certainly  decide 
that  the  bank  issuing  the  credit  was  estopped  from  cancelling  it. 

Issuing  or  Notifying  Bank? 

To  what  extent,  and  in  what  respects  was  there  an 
actual  conflict  in  principle  in  these  views,  and  how  may 
that  conflict  be  reconciled?  It  is  likely  that  Mr.  Spalding 
had  in  mind,  in  his  observations  on  the  subject  of  can- 
cellation, the  obligation  of  the  opening  bank.  Such  con- 
fusion as  exists  in  England  on  this  subject  undoubtedly 
arises  from  the  fact  that  the  existence  of  a  "bankers* 
credit,"  so-called,  which  does  not  state  whether  it  is 
revocable  or  irrevocable,  is  recognized. 

The  American  banks,  on  the  contrary,  had  been  asked 
for  their  opinion  about  their  obligation  as  paying  banks 
in  connection  with  revocable  credits,  opened  by  corre- 
spondents, and  advised  by  them  without  confirmation. 
The  wide  variance  between  the  answers  given  by  Amer- 
ican banks  to  Mr.  Edwards'  questionnaire  is  attributable 
to  the  fact  that  some  of  them  had  apparently  overlooked 
this  distinction,  and  had  thought  themselves  bound  by 
precedents  which  apply  only  to  opening  banks,  and  only, 
also,  to  credits  which  are  silent  on  the  question  of  revoc- 
ability.  This  statement  is  based  on  the  inference  that 
there  is  a  distinction  between  the  duty  of  the  opening 
and  of  the  paying  bank  with  regard  to  notice  of  revoca- 
tion.    What  brings  about  this  distinction? 

The  Duty  to  Give  Notice 

Thomas  P.  Alder,  Treasurer  of  the  United  States 
Steel  Products  Company,  in  a  thought-provoking  article 
in  the  New  York  Credit  Men's  Association  Bulletin  of 


THE  RIGHT  TO  REVOKE  i33 

January,  1922,  in  discussing  this  question  of  the  notify- 
ing bank's  duty  to  give  the  beneficiary  notice  of  can- 
cellation, makes  this  suggestion : 

There  may  be  good  reasons  for  cancelling  a  credit  of  this 
character,  but  there  can  be  no  reason  for  making  the  cancellation 
effective  prior  to  the  receipt  of  written  notice  from  the  bank 
issuing  the  document  delivered  to  the  beneficiary. 

This  is  a  plausible  but  unsound  doctrine.  Supppose 
that  Beyer  at  the  request  of  Benedict,  who  is  aware  that 
he  sees  West  daily  at  a  luncheon  club,  says  to  West, 
over  their  coffee:  "By  the  way,  West,  Benedict  asked 
me  to  tell  you  that  he  would  hand  me  $10  to  give  to  you, 
if  you  send  him  that  book."  Undoubtedly,  Beyer  would 
not  convey  this  message  to  his  friend  West  unless  he 
thought  Benedict  would  perform  his  promise.  But  on 
the  morrow  Beyer  is  dismayed  to  learn  that  Benedict  has 
gone  to  the  wall  and  cannot,  therefore,  hand  him  the  $10 
to  give  to  West.  He  regretfully  discloses  the  news  to 
West  at  lunch  and  adds  that  he  hopes  West  had  not  sent 
the  book.  West,  rather  perturbed,  states  that  he  mailed 
the  book  to  Benedict  yesterday  afternoon.  So  far  the 
example  sounds  rational.  Now  for  the  impossible  end- 
ing! 

West:    "Then  you  must  pay  me  $10." 

Beyer  (registering  astonishment)  :  "How  do  you 
figure  that?" 

West:  "Because  you  failed  to  notify  me  that  Bene- 
dict could  not." 

The  statement  will  bear  reiteration,  that  the  notifying 
bank  assumes  no  liability,  and  sets  up  none  on  its  books 
in  connection  with  its  advice  of  a  revocable  credit  issued 
by  another  bank.  If,  however,  the  beneficiary  could,  by 
action  taken  without  the  consent  or  knowledge  of  the 


134  AMERICAN  COMMERCIAL  CREDITS 

notifying  bank,  convert  the  credit  into  a  liability  of  the 
notifying  bank,  then  the  notifying  bank  would  have  to 
set  it  up  as  a  liability  at  the  time  the  credit  was  advised, 
and  the  difference  between  it  and  a  confirmed  credit 
would  disappear.  The  mere  statement  of  this  proposition 
destroys  it. 

Correspondent  banks  everywhere,  though  they  recog- 
nize no  responsibility  to  do  so,  usually,  as  a  matter  of 
course,  advise  the  beneficiary  in  some  fashion  of  the 
receipt  of  such  instructions.  Undoubtedly,  no  bank  which 
is  careful  of  its  reputation  would  mail  such  an  advice 
unless  it  were  reasonably  confident  of  the  intention  of 
the  principal  to  have  funds  on  hand  to  pay  the  beneficiary's 
draft  when  presented.  That  is,  however,  a  wholly  moral 
responsibility.  There  is  no  reason  for  the  notifying  bank 
to  go  beyond  that  point  and  to  appraise  the  credit  risk 
sufftciently  to  determine  whether  it  would  be  willing  to 
undertake  a  commitment  of  that  amount.  If  the  bene- 
ficiary is  content  to  rely  simply  on  the  opening  bank's 
revocable  commitment — for  that  is  all  this  type  of  credit 
purports  to  supply — and  to  accept  the  chance  that  the 
notifying  and  paying  bank  may  not  have  funds  of  the 
opening  bank  at  hand  with  which  to  pay  the  drafts  when 
presented,  and  that  its  instructions  to  pay  will  remain 
uncanceled,  he  will  accept  the  credit.  If  the  beneficiary 
is  not  content  to  take  this  risk  he  should  reject  the 
credit. 

A  Sound  English  Decision 

Luckily  for  English  merchants  and  bankers,  the  ques- 
tion of  the  duty  of  a  notifying  and  paying  bank  to  give 
the  beneficiary  notice  of  cancellation  of  an  unconfirmed 
credit  has  now  been  decided  by  their  courts.  On  June 
14,  1920,  Lloyds  Bank  in  London  issued  a  credit  in  favor 


THE  RIGHT  TO  REVOKE  I3S 

of  the  Cape  Asbestos  Company,  Ltd.,  containing  the  fol- 
lowing footnote: 

This  is  an  advice  of  the  opening  of  a  credit  and  is  not  to  be 
taken  as  a  confirmation  of  same. 

On  August  4  the  credit  was  withdrawn  by  the  War- 
saw Bank,  which  had  instructed  Lloyds  Bank  to  open  it, 
but  through  inadvertence  the  beneficiary  was  not  advised 
by  Lloyds  Bank  of  this  circumstance.  On  October  2 
the  beneficiary  sent  to  Lloyds  Bank  documents  relating 
to  a  part  shipment,  and  when  payment  was  refused 
brought  suit.  The  action  was  heard  by  Mr.  Justice 
Bailhache  in  the  Court  of  King's  Bench,  who  held  that, 
while  it  was  regrettable  that  the  bank  had  neglected  to 
inform  the  plaintiff  that  the  credit  had  been  withdrawn, 
the  first  notice  given  by  the  bank  to  the  beneficiary  was 
of  a  revocable  credit,  which  told  the  person  in  whose 
favor  it  had  been  opened  that  he  might  find  it  revoked 
at  any  time.  He  came  to  the  conclusion,  therefore,  that 
however  wise  and  prudent,  and  however  much  in  the 
interests  of  business  notice  of  revocation  might  have 
been,  there  was  no  legal  basis  under  which  he  could  find 
an  obligation  of  the  bank  to  give  it. 

Notice  by  the  Opening  Bank 

While  it  can,  therefore,  be  accepted  as  sound  doc- 
trine supported  by  legal  authority  that  the  paying  bank, 
which  has  assumed  no  liability,  need  take  no  steps  to 
give  notice  of  the  termination  of  that  which  never  existed, 
there  are  still  to  be  considered  the  steps  which  the  open- 
ing bank,  which  has  assumed  a  liability,  should  take  to 
revoke  it.  Need  it  give  no  notice  whatsoever?  If  so, 
then  a  paying  or  negotiating  bank  would  always  take  the 
risk  that  any  payment  made  by  it  might  be  excepted  to, 


136  AMERICAN  COMMERCIAL  CREDITS 

or  drafts  negotiated  by  it  dishonored,  on  the  plea  that 
the  opening  bank  had  previously  revoked  the  credit  on 
its  own  books.  Obviously,  business  cannot  be  done  in 
that  way.  Will  it  suffice,  then,  for  the  opening  bank  to 
give  notice  to  the  bank  which  it  has  selected  as  paying 
or  negotiating  agent?  That,  it  will  be  recalled,  is  exactly 
what  is  claimed  by  the  British  bank  in  connection  with 
the  unconfirmed  credit,  which  is  discussed  in  the  chapter 
on  confirmation.  Unquestionably,  there  was  no  further 
duty  in  connection  with  that  credit;  but  in  discussing 
what  shall  be  adopted  as  a  standard  practice  for  future 
use,  it  is  pertinent  to  inquire  whether  the  opening  bank 
should,  in  fairness,  offer  a  beneficiary  a  credit  which 
may  be  revoked  without  notice  to  him. 

Is  there  any  reason  to  go  further,  and  give  effect  to 
the  doctrine  that  the  beneficiary  of  a  revocable  credit, 
by  proceeding  with  the  execution  of  the  order,  can  put 
the  opening  bank  under  an  obligation  to  pay,  though 
notice  of  cancellation  reaches  him  before  he  has  availed 
himself  of  the  credit?  Apparently  the  theory  on  which 
those  have  relied  who  have  asserted  this  right,  is  that 
the  opening  bank  is  estopped  to  cancel  the  credit.  With- 
out going  too  far  into  legal  intricacies,  it  may  be  stated 
that  estoppel  has  as  an  essential  element  an  untruthful 
representation  by  the  party  sought  to  be  estopped,  believed 
by  the  other  party  and  relied  on  to  his  detriment.  A  com- 
mercial letter  of  credit  or  advice  which  states  that  it  is 
subject  to  cancellation,  is,  if  these  words  can  be  given 
their  plain,  ordinary  meaning,  subject  to  cancellation,  and 
affords  no  basis,  in  law  or  common  sense,  for  an  estoppel. 

Difficulty  of  Giving  Notice 

Theoretically,  at  least,  the  satisfactory  way  to  com- 
promise the  views  of  those  who,  on  the  one  hand,  assert 


THE  RIGHT  TO  REVOKE  I37 

that  the  right  of  revocation  is  non-existent,  and  those 
who,  on  the  other  hand,  assert  that  it  can  be  invoked 
without  notice,  would  be  to  adopt  a  form  of  credit  instru- 
ment which  continued  in  force,  so  far  as  the  opening 
bank  was  concerned,  until  notice  of  revocation  were  given 
the  shipper.  But  theoretical  solutions  must,  in  commercial 
letter  of  credit  operations,  as  in  other  business  relation- 
ships, be  tested  by  the  difficulties  their  practical  operation 
may  create.  And  in  this  case  it  was  the  opinion  of 
counsel  that  effectual  notice  of  cancellation  could  be  given 
only  by  stipulating  in  the  terms  of  the  advice  that  it 
would  be  conveyed  by  letter  or  telegram,  directed  to  the 
beneficiary,  and  either  (delivered  to  him  or  left  at  the 
address  stated  at  the  head  of  the  letter  of  credit  or 
advice. 

Of  course,  this  is  equally  true  of  notice  given  by 
bank  to  bank.  However,  banks  are  not  of  migratory 
nature  and  so  long  as  they  continue  to  exist  must  operate 
every  business  day,  through  officials  whose  position  and 
authority  are  matters  of  public  knowledge.  The  exporter's 
business  is,  however,  of  a  private  nature,  and  the  task 
of  giving  him  effective  notice  of  cancellation  of  a  com- 
mercial letter  of  credit  could,  it  is  conceivable  under 
certain  circumstances,  become  as  arduous  as  that  of  a 
process-server  seeking  an  elusive  witness,  or  a  bill-col- 
lector hunting  out  a  wily  debtor.  The  difficulties  that 
may  arise  to  interfere  with  the  timely  presentation  of 
documents  have  already  been  combined  with  the  familiar 
triangle  of  villian,  heroine,  and  hero,  to  furnish  the  plot 
for  a  short  story,  "Piracy  in  Reverse"  by  George  Kibbe 
Turner,  in  the  Saturday  Evening  Post,  February  i8,  1922. 
If  the  banks  were  to  assume  the  offsetting  task  of  giv- 
ing the  beneficiary  notice  of  revocation  before  he  could 
present  his  documents,  a  game  of  hide-and-seek  might 


138  AMERICAN  COMMERCIAL  CREDITS 

result  which  could  furnish  thrills  for  a  moving-picture 
serial. 

Notice  Not  Given  Under  Present  Practice 

If  the  present-day  "revocable"  commercial  letter  of 
credit  were  in  fact  good  until  revoked,  as  its  name  would 
imply,  banks  would  at  present  be  assuming  the  task  of 
giving  effectual  notice  of  cancellation  to  the  beneficiary. 


Important  Notice 

In  order  to  avoid  any  misunderstanding  in  regard  to  the 
credit  outlined  in  the  accompanying  communication,  we  beg 
to  say  that  this  is  not  a  confirmed  credit  and  consequently 
is  subject  to  revocation  at  any  time,  either  by  the  parties 
granting  the  credit  or  by  ourselves  under  certain  conditions. 
In  the  absence  of  any  statement  to  the  contrary,  The 
National  City  Bank  of  New  York  assumes  no  obligation 
whatsoever  to  make  the  payment,  even  if  all  the  conditions 
of  credit  have  been  complied  with. 

If  this  is  not  acceptable  to  you  please  communicate  with 
your  customer  and  request  him  to  have  his  banker  amend 
the  instructions. 

Please  note  for  your  guidance  that  a  confirmed  credit  is 
absolutely  irrevocable  provided  the  conditions  of  the  credit 
have  been  complied  with. 


Figure  i8.     Notice  Attached  to  Unconfirmed  Credit 

As  a  general  thing,  however,  they  have  relieved  them- 
selves of  this  responsibility  by  the  insertion  of  a  clause 
which  permits  the  modification  or  cancellation  of  the 
credit  without  notice  to  the  beneficiary.  For  instance, 
there  is  pasted  on  the  face  of  the  unconfirmed  credit 
(Figure  17,  page  70)  a  slip  reading  as  shown  in  Fig- 
ure 18. 


THE  RIGHT  TO  REVOKE  I39 

Right  to  Notice  Without  Practical  Value 

It  has  already  been  pointed  out  that  even  though  a 
beneficiary  had  not  received  notice  of  cancellation,  he 
would  not,  by  presenting  his  documents  drawn  under  a 
revocable  credit  to  the  paying  bank,  be  assured  of  pay- 
ment. He  would  thereby  simply  establish  a  basis  for 
legal  action  against  the  opening  bank.  If  the  opening 
bank  were  sound,  there  would  be  no  occasion  for  the 
paying  bank  to  decline  to  effect  payment,  so  that  the 
most  the  shipper  would  gain  by  being  the  beneficiary 
of  a  credit,  revocable,  but  only  on  notice,  would  be  the 
chance  to  prosecute  a  claim  against  a  foreign  corporation 
or  banking  firm  of  dubious  standing.  This  is  the  full 
extent  of  the  shipper's  gain  over  that  which  he  would 
receive  by  being  advised  by  the  notifying  bank  that  the 
opening  bank  had  authorized  it  to  pay  his  drafts,  and 
that  the' drafts  could  be  offered  for  payment  before  a 
certain  date,  although  the  advice  conveyed  no  engage- 
ment by  either  bank  to  the  shipper,  and  the  authority 
was  subject  to  modification  or  revocation  without  notice 
to  him. 

The  Revocable  Credit  Eliminated 

In  the  light  of  all  these  circumstances,  the  conclusion 
was  reached  that  for  practical  reasons  it  was  inadvisable 
to  provide  the  shipper  a  revocable  credit.  If  the  shipper 
needs  protection  against  cancellation,  a  revocable  credit 
does  not  supply  it.  If  he  does  not  feel  the  need  of 
protection  against  cancellation,  the  advice  of  authority 
to  pay  gives  him  all  he  requires.  In  proceeding  to  the 
work  of  drafting  commercial  credit  instruments  and 
advices,  therefore,  the  committee  eliminated  the  revocable 
credit  from  consideration,  and  substituted  in  its  stead 
the  advice  of  authority  to  pay. 


CHAPTER  X 

THE  STANDARD  APPLICATION  AND 
AGREEMENT  TO  REIMBURSE 

The  Need  of  Standardization 

It  was  not  contemplated  at  the  outset  that  the  Com- 
mercial Credit  Conference  would  seek  to  regulate  the 
contractual  relationship  between  the  opening  bank  and 
the  accredited  buyer  by  suggesting  the  phraseology  to  be 
employed  in  the  form  of  application  used  by  the  buyer 
in  instructing  his  bank  to  open  a  commercial  letter  of 
credit  for  his  account,  and  of  his  agreement  to  reimburse 
it  for  the  outlay  authorized  on  his  behalf.  It  sooti  became 
evident,  however,  that  this  ground  would  have  to  be 
covered  also,  to  carry  the  work  of  standardization  to  com- 
plete success.  If  the  only  parties  concerned  in  a  com- 
mercial letter  of  credit  operation  were  the  opening  bank 
and  the  accredited  buyer,  it  would  perhaps  be  an  intrusion 
to  restrict  their  liberty  to  fix  their  mutual  rights  and 
responsibilities  by  private  negotiation.  A  commercial 
letter  of  credit,  however,  is  a  document  which  depends 
for  its  effectiveness  upon  the  inducement  it  holds  forth 
to  third  parties — to  the  beneficiary  and  to  the  negotiating 
bank  or  correspondent.  Not  until  the  precise  nature  of 
the  engagement  of  the  opening  bank  and  its  customer, 
each  to  the  other,  is  universally  established,  can  there  be 
any  certainty  concerning  the  rights  and  responsibilities  of 
these  third  parties.  It  was  felt,  therefore,  that  the  adop- 
tion of  standard  forms  of  credit  instruments  must  be  pre- 
ceded by  the  adoption  of  standard  forms  of  appplication 

140 


THE  AGREEMENT  TO  REIMBURSE  141 

and  agreement  to  reimburse,  if  complete  freedom  from 
friction  and  misunderstanding  was  to  be  attained. 

The  Value  of  Precedent 

So  long  as  the  phraseology  of  the  forms  of  application 
and  agreement  to  reimburse  which  were  employed  varied 
with  each  opening  bank,  it  was  impossible  to  arrive  at  a 
common  interpretation  of  the  mutual  responsibilities  of  the 
parties.  Such  litigation  as  might  arise  between  the  open- 
ing bank  and  the  accredited  buyer  would  fix  simply  the 
meaning  of  the  language  employed  in  the  particular  -writ- 
ing before  the  court.  On  the  other  hand,  now  that  stand- 
ard forms  are  generally  employed,  their  phraseology  will 
quickly  come  to  have  a  customary  interpretation,  and 
the  decisions  in  any  litigation  which  may  ensue  will  serve 
as  guide-posts  for  all. 

The  Value  of  a  Common  Policy 

Of  perhaps  even  greater  value  than  the  legal  pre- 
cedents which  may  be  established,  is  the  advantage  which 
will  result  from  the  adoption  of  a  common  policy  by 
opening  banks  with  respect  to  the  extent  to  which  they 
will  seek  to  protect  the  mercantile  risk  for  the  accredited 
buyer.  Up  to  the  present  time  some  banks  have  perhaps 
gone  too  far,  while  others  have  fallen  short,  in  the  matter 
of  requiring  accredited  buyers  to  relieve  their  corre- 
spondents and  themselves  from  responsibility  for  the 
genuineness  of  the  documents,  the  quality  of  the  mer- 
chandise, and  the  performance  by  the  seller  of  the  terms 
of  the  contract  of  sale.  The  result  has  been  that  negotiat- 
ing and  paying  banks  have  become  involved  in  disputes 
and  litigation,  in  some  instances  because  of  alleged  lack 
of  care  in  scrutinizing  documents,  although  the  same 
degree  of  scrutiny  has  in  other  cases  been  recognized  as 


142  AMERICAN  COMMERCIAL  CREDITS 

fulfilment  of  their  duty  in  that  connection.  Now  that 
opening  banks  are  a  unit  in  dealing  with  accredited  buyers 
on  this  point,  the  foundation  is  laid  upon  which  to  build 
a  more  consistent  policy  with  respect  to  the  protection 
of  the  mercantile  risk,  which  will  be  considered  in  detail 
in  Chapter  XIV. 

The  Standard  Application 

The  use  of  a  standard  form  of  application  is  calcu- 
lated to  assure  the  opening  bank  that  it  will  receive  at 
once*  all  the  information  it  requires,  couched  in  language 
which  is  readily  assimilated  in  commercial  credit  termin- 
ology. Such  a  form  frees  the  bank  from  the  precarious 
task  of  selecting  the  details  to  be  incorporated  in  the 
credit  from  the  mass  of  correspondence  between  buyer 
and  seller  which  is  otherwise  usually  tendered  it  with  the 
request  for  the  credit.  The  form  of  appplication  adopted 
is  shown  in  Figure  19. 

The  Agreement  to  Reimburse 

It  will  serve  as  an  interesting  contrast  to  compare 
the  rather  extensive  form  which  has  now  been  devised 
to  evidence  the  agreement  of  the  accredited  buyer  to 
reimburse,  with  the  brief  form  used  to  evidence  a  similar 
agreement  with  the  National  City  Bank  of  New  York, 
in  connection  with  the  credit  shown  in  Figure  6  (page 
47) .    This  latter  form  was  as  follows : 

The  National  City  Bank  of  New  York  having,  at  our  request, 
opened  by  today's  mail  a  Revolving  Credit  with  the  Deutsche  Bank 
(Berlin)  London  Agency,  London,  for  Fifty  Thousand  Pounds 
Sterling  (£50,000.-/-),  available  by  the  90  d/s  drafts  of  Messrs. 
Beeche  &  Co.,  Valparaiso,  for  payments  to  Cia  Huanchaca  de 
Bolivia,  we  hereby  agree  to  cover  the  same  National  City  Bank 
in  due  time  for  our  drafts  against  this  credit,  plus  a  commission 


Commercial  Credit  Conference 

APPLICATION  FOR  COMMERCIAL  LETTER  OF 

CREDIT 

....  (opening  bank)  ....  Date 

(address) 

Dear  Sirs: 

I/We  hereby  request  you  to  open  and  transmit  by  ^oij^an 

S^SrSL  of  credit  »!»"  *«  ^o"-'"^  *«™=  -^ 
conditions: 

in  favor  of (beneficiary) 

for  account  of (applicant  requesting  credit) 

for  a  sum  or  sums  not  exceeding  a  total  of (amount 

in  words) 

available   by   drafts   on (if   on   applicant,  without 

recourse) 

at (tenor  of  drafts) 

if  accompanied  by  the  following  documents: 

Full  set  of  n^otiable  ocean  bills  of  lading  made  out  to 

the  order  of (opening  bank) Bank. 

Cross  out      Commercial  invoice 
documents    Consular  invoice 

not         Marine  insurance  policy  or  certificate 
required.        War  risk  insurance  policy  or  certificate 

Certificate  of 

Certificate  of 


evidencing  shipment  from 

to of  '^  *«  • '  invoice  cost  of (name  of 

C.I.F. 

property) F.A.S.  (place) 

F.O.B.  (vessel) 

Mine  risk  ;„,„^^„^^  +^k^  off^^+oxi  u.r  shipper  under  blanket 

Tv/T :„^      insurance  to  be  eiiected  by  ^^/^  ..^^i:^,, 

Marme  ■'  me/ us  policy 

No issued  by (name  of  insurance  company) 


This  credit  is  (not)  to  be  confirmed  by  a  correspondent  bank. 

Drafts  must  be  drawn  and  presented,  or  negotiated,  not  later 

than  ....  (expiration  date)  .... 

I/We  hereby  agree  to  sign,  and  deliver  to  you,  an  agreement 

for  such  credit,  in  the  form  now  used  by  you,  the  provisions  of 

which  are  agreed  to  as  defining   your   rights   and  my /our 

obUgations. 

Each  of  the  provisions  on  the  back  hereof,  except  so  far  as 
otherwise  expressly  stated,  is  to  be  incorporated  as  part  of 
the  credit. 


Figure  19.    Standard  Application  for  Commercial  Letter  of  Credit 

143 


144  AMERICAN  COMMERCIAL  CREDITS 

of  H%i  and  we  further  agree  to  hold  the  National  City  Bank 
harmless  in  every  way.  (C.C.  No.  93.)  The  credit  to  be  con- 
firmed from  London  by  cable. 

The  difference  between  this  simple  agreement  to 
reimburse  the  opening  bank  for  payments  made  and  the 
present  standard  form,  adopted  by  the  Commercial  Credit 
Conference,  can  best  be  appreciated  by  examining  the 
latter  paragraph  by  paragraph  and  briefly  setting  forth 
the  purpose  each  paragraph  is  intended  to  serve. 

Commercial  Letter  of  Credit  Agreement 

In  consideration  of  your  opening,  at  our  request,  your  Com- 
mercial Letter  of  Credit  No ,  (herein  called  "the 

Credit")  the  terms  of  which  appear  on  the  reverse  side  hereof, 
and  are  hereby  approved  by  us,  we  hereby  agree  as  follows : 

Specific  approval  of  the  terms  of  the  credit  is  requested 
to  prevent  dispute  as  to  whether  the  credit  was  opened 
in  strict  accordance  with  the  terms  of  the  application. 

I.  As  to  drafts  or  acceptances  under  or  purporting  to  be  under 
the  Credit,  which  are  payable  in  United  States  currency,  we  agree : 
(a)  in  the  case  of  each  sight  draft,  to  reimburse  you  at  your  (New 
York)  office,  on  demand,  in  United  States  gold  coin,  the  amount 
paid  on  such  draft  or,  if  so  demanded  by  you,  to  pay  to  you  at  your 
office  in  advance  in  such  coin  the  amount  required  to  pay  such 
draft;  and  (b)  in  the  case  of  each  acceptance,  to  pay  to  you, 
at  your  (New  York)  office,  in  United  States  gold  coin,  the  amount 
thereof,  on  demand  but  in  any  event  not  later  than  one  business 
day  prior  to  maturity,  or,  in  case  the  acceptance  is  not  payable  at 
your  (New  York)  office,  then  on  demand  but  in  any  event  in  time 
to  reach  the  place  of  payment  in  the  course  of  the  mails  not  later 
than  one  business  day  prior  to  maturity. 

Agreement  to  reimburse  the  opening  bank  for  pay- 
ments made  of  dollar  drafts. 


THE  AGREEMENT  TO  REIMBURSE  i45 

2.  As  to  drafts  or  acceptances  under  or  purporting  to  be  under 
the  Credit,  which  are  payable  in  currency  other  than  United  States 
currency,  we  agree :  (a)  in  the  case  of  each  sight  draft,  to  reim- 
burse you,  at  your  (New  York)  office,  on  demand,  the  equivalent 
of  the  amount  paid,  in  United  States  gold  coin  at  the  rate  of 
exchange  then  current  in  (New  York)  for  cable  transfers  to  the 
place  of  payment  in  the  currency  in  which  such  draft  is  drawn; 
and  (b)  in  the  case  of  each  acceptance,  to  furnish  you,  at  your 
(New  York)  office,  on  demand,  but  in  any  event  in  time  to  reach 
the  place  of  payment  in  the  course  of  the  mails  not  later  than  one 
business  day  prior  to  maturity,  with  first  class  bankers'  demand 
bills  of  exchange  to  be  approved  by  you  for  the  amount  of 
acceptance  payable  in  the  currency  of  the  acceptance  and 
bearing  our  endorsement,  or,  if  you  so  request,  to  pay  to  you, 
at  your  (New  York)  office,  on  demand,  the  equivalent  of  the 
acceptance  in  United  States  gold  coin  at  the  rate  of  exchange  then 
current  in  (New  York)  for  cable  transfers  to  the  place  of  payment 
in  the  currency  in  which  the  acceptance  is  payable. 

Agreement  to  reimburse  the  opening  bank  for  pay- 
ments made  in  foreign  currency.  Reimbursement  for 
sight  payments  is  required  at  the  cable  rate  because  pay- 
ment has  already  been  made  at  the  time  the  opening 
bank  and  its  customer  are  advised,  and  the  further  exten- 
sion of  credit  in  the  form  of  a  cash  advance  is  not  con- 
templated. Reimbursement  for  acceptances  made  is 
provided  at  the  check  rate,  because  there  is  time  to  for- 
ward checks  before  the  acceptances  mature.  By  requir- 
ing a  check,  the  credit  risk  is  shortened  correspondingly, 
by  the  receipt  by  the  opening  bank  of  first-class  bankers' 
bills  of  exchange  several  weeks  in  advance  of  the  maturity 
of  the  acceptance.  The  opening  bank  has,  however,  the 
option  of  requiring  a  cable  transfer,  on  demand,  if  it  so 
desires. 

3.  We  also  agree  to  pay  to  you,  on  demand,  a  commission  at 

the  rate  of per  cent  (     %)  on  such  part  of  the  Credit 

as  may  be  used,  and,  in  any  event,  a  minimum  commission  of 


146  AMERICAN  COMMERCIAL  CREDITS 

per  cent,  of  the  amount  of  the  Credit,  and  all  charges  and 

expenses  paid  or  incurred  by  you  in  connection  therewith,  and 
interest  where  chargeable. 

Brings  the  American  practice  into  conformity  with 
continental  usage  by  charging  a  minimum  commission  to 
compensate  the  opening  bank  for  the  cost  of  opening  the 
credit,  though  it  be  not  utilized. 

4.  We  hereby  recognize  and  admit  your  ownership  in  and 
unqualified  right  to  the  possession  and  disposal  of  all  property 
shipped  under  or  pursuant  to  or  in  connection  with  the  Credit 
or  in  any  way  relative  thereto  or  to  the  drafts  drawn  there- 
under, whether  or  not  released  to  us  on  trust  or  bailee  receipt, 
and  also  in  and  to  all  shipping  documents,  warehouse  receipts, 
policies  or  certificates  of  insurance  and  other  documents  accom- 
panying or  relative  to  drafts  drawn  under  the  Credit,  and  in  and 
to  the;  proceeds  of  each  and  all  the  foregoing,  until  such,  time 
as  all  the  obligations  and  liabilities  of  us  or  any  of  us  to  you  at 
any  time  existing  under  or  with  reference  to  the  Credit  or  this 
agreement  or  any  other  credit  or  any  other  obligation  or  liability 
to  you  have  been  fully  paid  and  discharged,  all  as  security 
for  such  obligations  and  liabilities;  and  that  all  or  any  of 
such  property  and  documents,  and  the  proceeds  of  any  thereof, 
coming  into  the  possession  of  your  or  any  of  your  corre- 
spondents, may  be  held  and  disposed  of  by  you  as  hereinafter  pro- 
vided ;  and  the  receipt  by  you,  or  any  of  your  correspondents,  at 
any  time  of  other  security,  of  whatsoever  nature,  including  cash, 
shall  not  be  deemed  a  waiver  of  any  of  your  rights  or  powers 
herein  recognized. 

Intended  to  furnish  a  written  recognition  by  the 
customer  of  the  security  title  which  the  opening  bank 
attains,  according  to  the  law  of  many  of  our  states,  by 
advancing  the  purchase  price  of  the  property  which  is 
the  subject  of  the  credit.  Recognition  of  this  security 
title  is  particularly  valuable  in  asserting  claim,  in  case  of 
bankruptcy,  in  opposition  to  general  creditors,  against 
property  which  has  been  released  in  trust  receipt. 


THE  AGREEMENT  TO  REIMBURSE  147 

5.  Except  insofar  as  instructions  have  been  heretofore  given  by 
us  in  writing  expressly  to  the  contrary,  we  agree  that  you  and  any 
of  your  correspondents  may  receive  and  accept  as  "bills  of  lading" 
under  the  Credit,  any  documents  issued  or  purporting  to  be  issued 
by  or  on  behalf  of  any  carrier  which  acknowledge  receipt  of 
property  for  transportation,  whatever  the  specific  provisions  of 
such  documents,  and  that  the  date  of  each  such  document  shall  be 
deemed  the  date  of  shipment  of  the  property  mentioned  therein; 
and  that  you  may  receive  and  accept  as  documents  of  insurance 
either  insurance  policies  or  insurance  certificates. 

Intended  to  prevent  controversy  by  requiring  the 
customer  to  indicate  in  advance  his  attitude  toward  the 
shipping  and  insurance  questions  which  have  been  outlined 
in  Chapter  VIII. 

6.  Except  insofar  as  instructions  have  been  heretofore  given  by 
us  in  writing  expressly  to  the  contrary,  we  agree  that  part  ship- 
ments may  be  made  under  the  Credit  and  you  may  honor  the  rela- 
tive drafts ;  and  that  if  the  Credit  specifies  shipments  in  instalments 
within  stated  periods,  and  the  shipper  fails  to  ship  in  any  desig- 
nated period,  shipments  of  subsequent  instalments  may  neverthe- 
less be  made  in  their  respective  designated  periods  and  you  may 
honor  the  relative  drafts. 

Requires  the  indication  in  advance  of  the  customer's 
attitude  toward  further  controversial  matters. 

7.  We  agree  that  in  the  event  of  any  extension  of  the  maturity 
or  time  for  presentation  of  drafts,  acceptances  or  documents,  or 
any  other  modification  of  the  terms  of  the  Credit,  at  the  request 
of  any  of  us,  with  or  without  notification  to  the  others,  or  in  the 
event  of  any  increase  in  the  amount  of  the  Credit  at  our  request, 
this  agreement  shall  be  binding  upon  us  with  regard  to  the  Credit 
so  increased  or  otherwise  modified,  to  drafts,  documents  and 
property  covered  thereby,  and  to  any  action  taken  by  you  or  any 
of  your  correspondents  in  accordance  with  such  extension,  in- 
crease, or  other  modification. 

Permits  the  modification  of  the  terms  of  the  credit 
at  the  request  of  the  customer  without  notice  to  guar- 


148  AMERICAN  COMMERCIAL  CREDITS 

antors,  but  frees  guarantors  from  any  increase  in  amount 
in  the  request  for  which  they  did  not  join. 

8.  The  users  of  the  Credit  shall  be  deemed  our  agents  and  we 
assume  all  risks  of  their  acts  or  omissions.  Neither  you  nor  your 
correspondents  shall  be  responsible:  for  the  existence,  character, 
quality,  quantity,  condition,  packing,  value,  or  delivery  of  the 
property  purporting  to  be  represented  by  documents;  for  any 
difference  in  character,  quality,  quantity,  condition,  or  value  of 
the  property  from  that  expressed  in  documents;  for  the  validity, 
sufficiency,  or  genuineness  of  documents,  even  if  such  documents 
should  in  fact  prove  to  be  in  any  or  all  respects  invalid,  insuf- 
ficient, fraudulent  or  forged ;  for  the  time,  place,  manner,  or  order 
in  which  shipment  is  made;  for  partial  or  incomplete  shipment, 
or  failure  or  omission  to  ship  any  or  all  of  the  property  referred 
to  in  the  Credit;  for  the  character,  adequacy,  validity,  or  genuine- 
ness of  any  insurance;  for  the  solvency  or  responsibility  of  any 
insurer,  or  for  any  other  risk  connected  with  insurance;  for  any 
deviation  from  instructions,  delay,  default,  or  fraud  by  the  ship- 
per or  anyone  else  in  connection  with  the  property  or  the  shipping 
thereof;  for  the  solvency,  responsibility  or  relationship  to  the 
property  of  any  party  issuing  any  documents  in  connection  with 
the  property ;  for  delay  in  arrival  or  failure  to  arrive  of  either  the 
property  or  any  of  the  documents  relating  thereto;  for  delay  in 
giving  or  failure  to  give  notice  of  arrival  or  any  other  notice ;  for 
any  breach  of  contract  between  the  shippers  or  venders  and  our- 
selves or  any  of  us ;  for  failure  of  any  draft  to  bear  any  reference 
or  adequate  reference  to  the  Credit,  or  failure  of  documents  to 
accompany  any  draft  at  negotiation,  or  failure  of  any  person  to 
note  the  amount  of  any  draft  on  the  reverse  of  the  Credit  or  to 
surrender  or  take  up  the  Credit  or  to  send  forward  documents 
apart  from  drafts  as  required  by  the  terms  of  the  Credit  each  of 
which  provisions,  if  contained  in  the  credit  itself  it  is  agreed  may 
be  waived  by  you;  or  for  errors,  omissions,  interruptions  or  de- 
lays in  transmissions  or  delivery  of  any  messages,  by  mail,  cable, 
telegraph,  wireless  or  otherwise,  whether  or  not  they  be  in  cipher ; 
nor  shall  you  be  responsible  for  an  error,  neglect,  or  default  of 
any  of  your  correspondents;  and  none  of  the  above  shall  affect, 
impair,  or  prevent  the  vesting  of  any  of  your  rights  or  powers 
hereunder.    In  furtherance  and  extension  and  not  in  limitation  of 


THE  AGREEMENT  TO  REIMBURSE  149 

the  specific  provisions  hereinbefore  set  forth,  we  agree  that  any 
action  taken  by  you  or  by  any  correspondent  of  yours  under  or 
in  connection  with  the  Credit  or  the  relative  drafts,  documents  or 
property,  if  taken  in  good  faith,  shall  be  binding  on  us  and  shall 
not  put  you  or  your  correspondent  under  any  resulting  liability 
to  us ;  and  we  make  like  agreement  as  to  any  inaction  or  omission, 
unless  in  breach  of  good  faith. 

Intended  to  place  the  merchandise  risk  of  the  trans- 
action on  the  customer,  and  not  on  the  opening  bank.  It 
purposely  frees  the  opening  bank  from  responsibility  and 
permits  it  to  free  any  notifying,  paying,  confirming,  or 
negotiating  bank  from  responsibility,  to  an  extent  exceed- 
ing that  they  generally  expect  to  be  accorded.  As  we 
come,  in  Chapter  XIV,  to  consider  the  protection  of  the 
mercantile  risk,  we  shall  see  that  it  is  highly  desirable 
that  the  opening  bank  should  possess  latitude  in  this 
direction,  so  that  it  may  be  free  to  prevent  its  customers 
from  raising  some  technical  objection  to  the  payment  of 
drafts  which  have  been  negotiated  in  good  faith.  The 
paragraph  gives  effect  to  the  opinion  of  the  New  York 
Supreme  Court,  Appellate  Division,  in  the  case  of  Lam- 
born  V.  The  Lake  Shore  Banking  and  Trust  Company 
(196  App.  Div.  504),  in  which  it  was  pointed  out 
that  the  opening  bank  might  rightfully  insist  upon  a 
strict  compliance  by  the  beneficiary  of  the  terms  of  the 
letter  of  credit,  or  waive  strict  compliance  and  neverthe- 
less require  the  customer  to  reimburse  it. 

9.  We  agree  to  procure  promptly  any  necessary  import  and 
export  or  other  licenses  for  the  import  or  export  or  shipping  of 
the  property  and  to  comply  with  all  foreign  domestic  governmental 
regulations  in  regard  to  the  shipment  of  the  property  or  the 
financing  thereof,  and  to  furnish  such  certificates  in  that  respect  as 
you  may  at  any  time  require,  and  to  keep  the  property  adequately 
covered  by  insurance  satisfactory  to  you,  in  companies  satisfactory 
to  you,  and  to  assign  the  policies  or  certificates  of  insurance  to 


ISO  AMERICAN  COMMERCIAL  CREDITS 

you,  or  to  make  the  loss  or  adjustment,  if  any,  payable  to  you,  at 
your  option;  and  to  furnish  you  if  demanded  with  evidence  of 
acceptance  by  the  insurers  of  such  assignment. 

Requires  the  customer  to  keep  the  property  adequately 
insured. 

10.  Each  of  us  agrees  at  any  time  and  from  time  to  time,  on 
demand,  to  deliver,  convey,  transfer,  or  assign  to  you,  as  security 
for  any  and  all  of  his  and/or  our  obligations  and  liabilities  here- 
under, and  also  for  any  and  all  other  obligations  and  liabilities, 
absolute  or  contingent,  due  or  to  become  due,  which  are  now  or 
may  at  any  time  hereafter  be  owing  by  him  or  us  to  you,  ad- 
ditional security  of  a  value  and  character  satisfactory  to  you,  or 
to  make  such  cash  payment  as  you  may  require.  Each  of  us 
agrees  that  all  property  belonging  to  him,  or  us,  or  in  which  he 
or  we  may  have  an  interest,  of  every  name  and  nature  whatso- 
ever, now  or  at  any  time  hereafter  delivered,  conveyed,  trans- 
ferred, assigned,  or  paid  to  you,  or  coming  into  your  possession  or 
into  the  possession  of  anyone  for  you  in  any  manner  whatsoever, 
whether  expressly  as  security  for  any  of  the  obligations  or  liabili- 
ties of  him  or  us,  to  you,  or  for  safekeeping  or  otherwise,  including 
any  items  received  for  collections  or  transmission  and  the  pro- 
ceeds thereof,  whether  or  not  such  property  is  in  whole  or  in 
part  released  to  us  on  trust  or  bailee  receipt,  are  hereby  made 
security  for  each  and  all  such  obligations  and  liabilities. 
Each  of  us  agrees  that  upon  his  or  our  failure  at  all  times 
to  keep  a  margin  of  security  with  you  satisfactory  to  you,  or 
upon  the  making  by  him  or  us  of  any  assignment  for  the  benefit 
of  creditors,  or  upon  the  filing  of  any  voluntary  or  involuntary 
petition  in  bankruptcy  by  or  against  him  or  us,  or  upon  any 
application  for  the  appointment  of  a  receiver  of  any  of  his  or  our 
property,  or  upon  any  act  of  bankruptcy  or  state  of  insolvency 
of  him  or  us,  all  of  such  obligations  and  liabilities  shall  become 
and  be  immediately  due  and  payable  without  demand  or  notice 
notwithstanding  any  credit  or  time  allowed  to  him  or  us,  or  any 
instrument  evidencing  any  such  obligations  or  liabilities  or  other- 
wise; and  each  of  us,  as  to  property  in  which  he  may  have  any 
interest,  and  all  of  us,  as  to  property  in  which  we  may  have  any 
interest,  expressly  authorize  you  in  any  such  event,  or  upon  his 
or  our  failure  to  pay  any  of  such  obligations  or  liabilities  when 


THE  AGREEMENT  TO  REIMBURSE  iSi 

it  or  they  shall  become  or  be  made  due,  to  sell  immediately,  with- 
out demand  for  payment,  without  advertisement  and  without  notice 
to  us,  or  any  of  us,  all  of  which  are  hereby  expressly  waived, 
any  and  all  such  property,  arrived  or  to  arrive,  at  private  sale  or 
at  public  auction  or  at  brokers*  board  or  otherwise,  at  your  option, 
in  such  parcel  or  parcels  and  at  such  time  or  times  and  at  such 
place  or  places  and  for  such  price  or  prices  and  upon  such  terms 
and  conditions  as  you  may  deem  proper,  and  to  apply  the  net 
proceeds  of  such  sale  or  sales,  together  with  any  balance  of  de- 
posits and  any  sums  credit  by  or  due  from  you  to  him  or  us  in 
general  account  or  otherwise,  to  the  payment  of  any  and  all  of 
his  and/or  our  obligations  or  liabilities  to  you  however  arising. 
If  any  such  sale  be  at  brokers'  board  or  at  public  auction 
you  may  yourself  be  a  purchaser  at  such  sale,  free  from  any  right 
of  redemption,  which  we  and  each  of  us  hereby  expressly  waive 
and  release. 

Permits  the  opening  bank  to  demand  further  security 
whenever  it  may  seem  desirable  to  require  it,  gives  a  lien 
against  any  property  of  the  customer  in  the  opening 
bank's  possession,  and  provides  for  the  immediate  matur- 
ing of  the  obligation  of  any  obligor  who  becomes  insol- 
vent, but  not  that  of  any  other  obligor  who  remains 
solvent. 

11.  You  shall  not  be  deemed  to  have  waived  any  of  your  rights 
hereunder,  unless  you  or  your  authorized  agent  shall  have  signed 
such  waiver  in  writing.  No  such  waiver,  unless  expressly  as 
stated  therein,  shall  be  effective  as  to  any  transaction  which 
occurs  subsequent  to  the  date  of  such  waiver,  nor  as  to  any 
continuance  of  a  breach  after  such  waiver. 

Intended  to  prevent  disputes  concerning  alleged  oral 
alterations  of  the  agreement. 

12.  The  word  "property"  as  used  in  this  agreement  includes 
goods,  merchandise,  securities,  funds,  choses  in  action,  and  any 
and  all  other  forms  of  property,  whether  real,  personal  or  mixed 
and  any  right  or  interest  therein. 


152  AMERICAN  COMMERCIAL  CREDITS 

A  general  definition  of  property. 

13.  If  this  agreement  is  signed  by  one  individual,  the  terms 
"we,"  "our,"  "us,"  shall  be  read  throughout  as  "I,"  "my,"  "me," 
as  the  case  may  be.  If  this  agreement  is  signed  by  two  or  more 
parties,  it  shall  be  the  joint  and  several  agreement  of  such 
parties. 

Yours  very  truly. 

Credits  Issued  for  Interior  Banks 

The  rather  limited  powers  given  to  our  national  and 
state  banks  by  the  provisions  of  the  statutes  under  which 
they  are  created,  result  in  the  introduction  into  com- 
mercial credit  business,  undertaken  in  this  country  by 
one  bank  for  account  of  another,  of  a  problem  from  which 
foreign  banking  is  free.  Neither  the  provisions  of  the 
National  Banking  Act  nor  of  the  Federal  Reserve  Act, 
for  instance,  confer  upon  our  national  banks  the  power 
to  guarantee  or  act  as  surety  on  a  letter  of  credit.  The 
result  is  that  if  the  directors  of  a  national  bank  enter 
into  such  a  contract  of  guaranty  or  suretyship  they 
assume  in  their  personal  capacity  the  risk  of  any  loss 
that  may  occur.  Yet  it  is  only  by  some  such  agreement 
as  this  that  an  interior  national  bank,  having  no  inter- 
national standing,  or  without  sufficient  business  to  develop 
a  department  capable  of  handling  foreign  transactions, 
can  take  care  of  the  needs  of  its  customers  who  wish  to 
obtain  letters  of  credit  which  will  be  satisfactory  to 
foreign  dealers.  If  the  customer  himself  must  go  to  a 
large  city  bank  where  his  financial  standing  may  not  be 
well  known,  his  request  for  credit  might  be  refused.  On 
the  other  hand,  the  local  bank,  although  it  does  not  wish 
to,  and  cannot  well,  furnish  a  satisfactory  letter  of  credit 
itself,  may  be  quite  willing  to  extend  its  credit  to  a  sea- 
board bank  which  is  equipped  and  has  an  international 


THE  AGREEMENT  TO  REIMBURSE  iS3 

standing  sufficient  to  furnish  a  commercial  credit  satis- 
factory to  the  buyer. 

This  difficulty,  arising  because  of  the  inability  of  a 
national  bank  to  guarantee  a  letter  of  credit,  may  be 
avoided  in  several  ways.  The  interior  bank,  instead  of 
guaranteeing  the  letter  of  credit,  can  execute  a  separate 
instrument  appointing  its  seaboard  correspondent  as  its 
agent  and  agreeing,  unconditionally,  to  reimburse  it  as 
such  for  any  monies  paid  out  in  the  case  of  a  sight  credit, 
or  put  it  in  funds  to  meet  the  acceptances  as  they  mature 
in  the  case  of  a  time  credit.  This  procedure  has  been 
approved  by  the  Federal  Reserve  Board  and  the  Comp- 
troller of  the  Currency  in  an  opinion  dated  April  26, 
1 92 1.  Another  method  which  has  perhaps  the  same  effect 
is  to  have  the  application  for  the  credit  made  directly  by 
the  interior  bank  to  the  seaboard  bank  with  a  simple 
undertaking  on  the  part  of  the  interior  bank  to  place 
its  agent  in  funds  at  maturity  of  drafts  drawn  thereunder, 
accompanied  by  a  guaranty  of  similar  tenor  from  the 
interior  bank's  customer  to  the  seaboard  bank. 


CHAPTER  XI 

THE  STANDARD  COMMERCIAL  LETTERS  OF 
CREDIT 

Export  and  Import  Credits 

The  greatest  difficulty  encountered  in  drafting  uniform 
commercial  letters  of  credit  was  that  of  eradicating  the 
idea  that  there  was  an  inherent  distinction  between  an 
export  and  an  import  credit.  In  their  use  of  the  terms 
"export"  and  "import,"  bankers  and  merchants  generally 
lost  sight  of  the  fact  that  the  terms  do  not  relate  to 
separate  classes  of  transactions  but  only  to  the  end 
from  which  a  foreign  shipment  is  viewed.  Every 
foreign  trade  transaction  is  both  an  exportation  and  an 
importation;  and  every  commercial  credit  is  both  an 
export  and  an  import  credit.  To  the  beneficiary,  who  is 
the  seller,  and  to  the  notifying,  confirming,  negotiating, 
or  paying  bank,  it  is  an  export  credit ;  but  to  the  accredited 
buyer  and  to  the  opening  bank,  it  is  an  import  credit. 

There  is,  as  we  have  seen,  a  difference  between  the 
circular  negotiation  type  of  credit,  which  was  previously 
issued  by  London  banks  for  our  account,  and  which  is 
now  issued  direct  by  American  banks  to  finance  our 
import  transactions,  and  the  specially  advised,  straight, 
dollar  type  of  credit  which  our  merchants  demand  as 
reimbursement  for  their  export  shipments.  This,  how- 
ever, does  not  mean  that  one  type  is  essentially  of  more 
value  to  the  exporter  or  importer  than  the  other.  It 
indicates  simply  that  an  opening  bank  in  good  standing 
in  a  community,  the  financial  stability  of  \yhich  is  recog- 

154 


STANDARD  COMMERCIAL  LETTERS  OF  CREDIT  iS5 

nized  throughout  the  world  and  whose  medium  of 
exchange  is  everywhere  in  demand,  can  furnish  a  bene- 
ficiary a  useful  instrument  of  the  negotiation  type,  while 
an  opening  bank  in  a  vicinity  which  lacks  these  essential 
requirements  must  resort  to  the  use  of  specially  advised 
credits  which  instruct  their  correspondents  to  pay  the 
beneficiary  in  his  own  currency. 

The  peculiarities  of  the  American  commercial  credit 
business  at  the  present  time  are  due  to  these  circum- 
stances. The  American  importer  cannot  offer  a  safer 
or  more  useful  credit  in  these  days,  when  the  dollar  is 
everywhere  in  demand  and  the  standing  of  American 
banks  unquestioned,  than  the  obligation  of  an  American 
bank  evidenced  by  the  negotiation  type  of  credit.  By 
the  same  token,  our  exporters  want,  and  feel  that  they 
are  entitled  to  have,  a  similar  obligation,  not  being  content 
as  a  general  thing  to  accept  anything  except  a  dollar 
credit  confirmed  by  an  American  bank. 

The  Basic  Idea 

These  considerations  may  be  taken  into  account  in  fixr 
ing  upon  standard  credit  forms,  but  they  cannot  be  made 
the  basis  of  fundamental  classification.  The  selection  of 
a  satisfactory  type  of  credit,  from  the  point  of  view  of 
the  beneficiary,  depends  primarily  upon  the  purpose  the 
beneficiary  seeks  to  achieve.  If  he  is  entirely  content  to 
rely  upon  the  buyer's  promise  to  pay  the  drafts,  and 
seeks  only  to  avoid  having  his  own  capital  or  credit  line 
utilized  to  finance  the  shipment  while  it  is  in  transit,  the 
authority  to  purchase  will  suffice.  If  he  wants  security 
against  the  credit  risk,  he  will  seek  a  form  of  credit  which 
contains  a  banker's  promise  to  pay.  The  particular  type 
he  selects  will  depend  upon  the  degree  of  security  he 
requires. 


IS6  AMERICAN  COMMERCIAL  CREDITS 

The  basic  idea  behind  the  myriad  forms  of  so-called 
authorities  to  purchase,  authorities  to  pay,  commercial 
and  bankers',  export,  import,  unconfirmed,  confirmed, 
revocable,  and  irrevocable  credits,  is  simple  enough.  They 
all  evidence,  in  some  fashion,  either  the  obligation  of  the 
buyer  or  of  his  bank,  or  of  his  bank  and  a  banking 
correspondent,  located  either  in  the  domicile  of  the  seller 
or  elsewhere.  So  far  as  security  is  concerned,  the 
adoption  of  three  forms  clearly  evidencing  these  three 
types  of  obligation  supplies  all  the  variety  that  is  needed. 
In  fact,  there  has  been  no  greater  variety,  from  the  stand- 
point of  obligation;  there  has  simply  been  uncertainty 
as  to  which  combination  of  obligations  is  afforded  in  many 
of  the  credits  that  have  been  in  vogue. 

Selection  of  Obligation 

As  a  basis  for  standardization,  therefore,  three  types 
have  been  recognized  by  the  Commercial  Credit  Confer- 
ence as  evidencing,  respectively,  the  obligation  of  the 
buyer,  but  not  of  the  opening  or  a  notifying  bank;  the 
obligation  of  the  opening,  but  not  of  a  notifying  bank; 
and  the  obligation  of  both  the  opening  and  the  notifying 
banks. 

The  type  of  credit  which  evidences  the  obligation  of 
the  buyer,  but  not  that  of  the  opening  or  notifying  bank 
to  the  seller,  that  his  drafts  will  be  paid  is,  as  we  have 
already  seen,  represented  by  the  authority  to  purchase. 
In  the  work  of  standardization,  the  authority  to  purchase 
has  been  recognized  as  a  useful  type,  because  it  fulfils 
the  primary  purpose  of  financing  the  shipment  for  account 
of  the  buyer.  Its  general  employment  is  not  recommended, 
however,  primarily  because  its  use  is  largely  confined  to 
the  Far  Eastern  trade,  where  its  nature  is  well  under- 
stood, and   secondly   because   the   fact   that   recourse   is 


STANDARD  COMMERCIAL  LETTERS  OF  CREDIT  iS7 

preserved  against  the  beneficiary  excludes  it  from  the 
classification  of  bankers'  credits. 

A  bankers*  credit,  in  the  American  view,  is  not,  as 
Mr.  Spalding  states,  one  in  which  the  drafts  are  drawn 
on  a  bank,  but  rather  a  credit  which  constitutes  a  banker's 
engagement  that  drafts  will  be  honored  if  drawn  in 
accordance  with  its  terms,  though  the  terms  stipulate  that 
the  buyer  or  another  bank  shall  be  the  drawee. 

Of  bankers'  credits,  three  types  are  recognized:  if 
the  engagement  on  the  part  of  the  opening  bank  that 
drafts  will  be  honored  is  extended  to  the  paying  bank 
alone,  it  is  termed  an  "authority  to  pay" ;  if  to  the  bene- 
ficiary, it  is  termed  an  "irrevocable  credit";  if  the  same 
engagement  is  also  undertaken  by  a  second  bank,  it  is 
termed  a  "confirmed  irrevocable  credit." 

Selection  of  Method  of  Transmission 

For  the  transmission  of  the  advice  of  authority  to 
pay,  only  the  specially  advised  straight  payment  form  has 
been  provided. 

The  authority  to  pay  may  be  revoked  or  modified  at 
the  will  of  the  opening  bank,  but  this  action  cannot,  in 
fairness,  become  effective  against  the  paying  bank,  which 
is  in  effect  the  beneficiary,  as  against  any  drafts  which 
it  has  prior  to  receipt  of  notice  paid  on  the  faith  of  the 
instrument.  If  the  circular  negotiation  form  were  used  by 
the  opening  bank  for  the  issuance  of  the  advice  to  the 
beneficiary,  it  would  be  impossible  for  the  opening  bank  to 
notify  every  banker  to  whom  the  beneficiary  might  present 
it  with  his  drafts  for  negotiation,  of  its  revocation  or 
modification,  and  the  credit  would  become,  in  fact,  irre- 
vocable. Its  very  nature,  therefore,  restricts  its  use  to  the 
specially  advised  straight  payment  form. 

For  the  transmission  of  the  irrevocable  type  of  credit. 


IS8  AMERICAN  COMMERCIAL  CREDITS 

two  forms  are  provided — a.  specially  advised  form; 
and  a  circular  negotiation  form.  The  use  of  the  specially 
advised  form  is  essential  in  transmitting  by  cable  the 
irrevocable  type  of  credit,  consisting  of  the  obligation  of 
the  opening,  but  not  of  the  notifying  bank,  and  this  form 
is  convenient  even  when  transmission  is  made  by  mail, 
for  the  notifying  correspondent  will  have  the  facility  that 
other  bankers  in  the  domicile  of  the  beneficiary  may  lack, 
of  verifying  the  signatures  subscribed  to  the  instructions. 
Furthermore,  the  use  of  the  specially  advised  form 
enables  the  opening  bank  to  build  up  its  correspondent 
relationships,  assures  special  attention  to  its  own  interests 
as  well  as  to  those  of  the  beneficiary,  and  renders  it 
possible  subsequently  to  supplement  or  extend  the  credit 
terms  with  ease  and  safety. 

Provision  is  made,  however,  for  the  transmission  of 
the  specially  advised  irrevocable  credit  form  either  as  a 
straight  payment  or  as  a  negotiation  credit.  The  alternate 
methods  are  made  available  because  it  developed  in  the 
conference  hearings  that  there  was  a  diversity  of  opinion 
as  to  which  method  was  preferable.  One  group  of  bankers 
contended  that  there  was  no  occasion  for  a  departure 
from  past  practice,  in  which  there  had  generally  been 
employed  the  straight  payment  type  for  credits  providing 
payment  in  the  beneficiary's  local  currency,  and  the  nego- 
tiation type,  which  provided  payment  in  foreign  currency. 
Another  group  of  bankers  contended,  on  the  other  hand, 
that  while  the  straight  payment  type  was  not  suitable  for 
foreign  currency  credits,  because  it  restricted  the  freedom 
of  negotiating  for  a  satisfactory  rate  of  exchange, 
the  negotiation  type  was  entirely  suitable  for  both  local 
currency  and  foreign  currency  credits.  They  felt  that  the 
sole  adoption  of  the  negotiation  type  would  not  only 
obviate  the  necessity  of  providing  two  methods  for  the 


STANDARD  COMMERCIAL  LETTERS  OF  CREDIT  iS9 

transmission  of  a  practically  identical  obligation,  but 
would  increase  the  usefulness  of  the  credit  to  a  beneficiary 
whose  office  was  not  located  in  one  of  the  financial  centers 
where  the  credit-issuing  banks  are  situated,  by  enabling 
him  to  cash  his  documents,  even  if  in  local  currency,  at 
his  local  bank.  If  this  argument  is  sound,  undoubtedly 
the  specially  advised  negotiation  credit  will  grow  in  use; 
otherwise  the  former  practice  of  using  the  straight  pay- 
ment type  for  local  currency  credits  will  continue  to  be 
followed. 

A  circular  form  for  the  transmission  of  the  irrevocable 
type  of  credit  direct  by  the  opening  bank  to  the  bene- 
ficiary is  also  provided,  however,  because  long  usage  has 
demonstrated  that  the  provision  that  the  amounts  nego- 
tiated must  be  indorsed  on  the  back  affords  sufficient 
protection  against  double  negotiation  or  other  fraud,  and 
because  the  form  lends  itself  well  to  the  negotiation 
type  of  credits. 

For  the  sake  of  simplicity  also  only  the  specially 
advised  form  is  employed  in  connection  with  the  con- 
firmed irrevocable  type,  consisting  of  the  obligation  of 
both  the  opening  and  the  notifying  bank.  As  it  is  not 
until  confirmation  has  been  given  by  the  notifying  bank 
that  the  effectiveness  of  this  type  is  complete,  there  is  no 
need  of  direct  communication  between  the  opening  bank 
and  the  beneficiary,  while  the  resort  to  a  triangular  corre- 
spondence might  result  in  complications.  It  also  is  pro- 
vided either  as  a  straight  payment  or  as  a  negotiation 
credit. 

Advice  of  Authority  to  Pay — Commercial  Credit  Con- 
ference Form  A 

The  advice  of  authority  to  pay,  or  Commercial  Credit 
Conference  Form  A  (Figure  20),  has  been  termed  the 


i6o  AMERICAN  COMMERCIAL  CREDITS 


Commercial  Credit  Conference — Form  A 
ADVICE  OF  AUTHORITY  TO  PAY  Advice  No.  A  . . . 

(city) 19 


Dear  Sirs: 

We  advise  you  that (correspondent  bank) 

Bank  have  authorized  us  to  honor  your  drafts  for  account  of 

for  a  sum  or  sums 

not  exceeding  a  total  of (figures) 

(words) 

on  us  at 

to  be  accompanied  by 


evidencing  shipment  of: 


insurance  to  be  effected  by 

All  drafts  so  drawn  must  be  marked : 

"  Drawn  as  per (advising  bank) Bank's 

Advice  No.  A ,  dated 19 . .  . " 

Drafts  so  drawn,  with  documents  as  specified,  must  be 
presented  at  our  office  not  later  than 19  ... 

The  authority  given  to  us  is  subject  to  revocation  or 
modification  at  any  time  without  notice  to  you. 

Each  of  the  provisions  on  the  back  hereof,  except  so  far 
as  otherwise  expressly  stated,  is  incorporated  as  part 
of  this  advice. 

This  advice  conveys  no  engagement  on  our  part  or  on 

the  part  of (correspondent  bank) Bank  and  is 

simply  for  your  guidance  in  preparing  and  presenting  drafts 
and  documents. 

Yours  very  truly, 


Figure  20.     Authority  to  Pay — Commercial  Credit  Conference 
Form  A 


STANDARD  COMMERCIAL  LETTERS  OF  CREDIT  i6i 

equivalent  of  the  Far  Eastern  authority  to  purchase,  but 
the  two  may  differ  in  an  important  respect.  The  authority 
to  purchase  is  not  a  bankers'  credit,  because,  though  the 
seller's  drafts  are  negotiated  for  their  face  value  by  a 
bank  for  the  buyer's  account,  there  is  no  undertaking  by 
a  bank  that  they  will  be  honored,  but  only  by  the  buyer, 
who  is  the  drawee  of  the  drafts.  For  this  reason  the 
recourse  against  the  seller  as  drawe<"of  the  drafts  which 
the  buyer's  bank  stipulates  when  it  authorizes  its  branch 
or  correspondent  to  advance  the  seller  the  face  of  the 
drafts,  is  vitally  important.  The  process  is  simply  one 
of  making  the  buyer's  discount  line  available  to  the  seller. 
The  authority  to  pay,  on  the  other  hand,  permits  the 
shipper  to  draw  on  the  notifying  bank,  and  the  freedom 
from  recourse  after  the  draft  is  paid  is  then  as  effective  as 
an  engagement  of  the  opening  bank  to  the  paying  bank  that 
the  seller's  draft  will  be  paid.  This  freedom  from 
recourse  does  not  exist  until  his  draft  is  presented  and 
paid,  but  it  is  an  effectual  bar  to  further  liability. 

There  is  this  similarity,  between  the  two  instruments, 
that  the  authority  to  pay,  like  the  authority  to  purchase, 
gives  the  seller  no  protection  against  modification  or 
cancellation.  The  authority  to  pay  may  be  revoked  or 
modified  at  any  time  without  notice  to  the  seller,  who 
cannot,  therefore,  properly  be  termed  the  beneficiary.  The 
American  authority  to  pay  is,  in  fact,  identical  with  the 
English  unconfirmed  credit,  which  has  been  analyzed  in 
detail  in  Chapter  V  (page  78).  On  the  other  hand,  the 
authority  to  pay  is  not  identical  with  the  revocable  credit 
— if  that  term  is  used  with  reference  to  a  credit  of 
which  the  seller  is  the  beneficiary.  A  revocable  credit  is 
one  which  is  good  until  revoked.  It  has  been  pointed  out 
in  Chapter  IX,  "The  Right  to  Revoke,"  that  the  advan- 
tages which  would  accrue  to  the  beneficiary  by  retaining 


i62  AMERICAN  COMMERCIAL  CREDITS 

for  him  the  right  to  have  notice  of  revocation,  are  so 
slight  in  comparison  with  the  difficulties  and  complica- 
tions that  would  thereby  be  created,  that  it  was  thought 
advisable  to  recommend  a  form  of  credit  which  would 
emphasize  the  true  aspect  of  the  matter.  For  the  "uncon- 
firmed credit"  therefore,  which  has  puzzled  Mr.  Spalding 
and  his  associates,  and  for  the  "revocable"  credit,  about 
which  American  banks  have  disagreed,  there  is  substituted 
the  advice  of  authority  to  pay,  which  is  equally  useful 
and  the  nature  of  which  is  more  precisely  defined. 

Irrevocable  Credit  ^ 

This  type  of  credit  evidences  the  irrevocable  obliga- 
tion of  the  opening  bank  to  the  shipper  as  beneficiary 
that  his  drafts  will  be  honored.  If  it  is  transmitted 
through  the  medium  of  a  notifying  bank,  the  latter  bank 
assumes  no  obligation  other  than  to  vouch  for  the  authen- 
ticity of  the  information  it  transmits.  Whether  trans- 
mitted directly,  or  specially  advised,  it  affords  the 
beneficiary  complete  protection  against  cancellation.  The 
two  forms  (see  Figures  21  and  22)  provided  for  the 
transmission  of  this  type  of  credit  are  identical  in  legal 
effect. 

Circular     Type  —  Commercial    ^Credit     Conference 
Form  B 

The  type  of  the  irrevocable  credit,  represented  by 
the  Commercial  Credit  Conference  Form  B  (Figure  21), 
is  the  classic  circular  negotiation  form  of  credit  which 
is  preferably  employed  by  banks  with  international  reputa- 
tions, where  there  is  time  for  the  instrument  to  reach  the 
beneficiary  by  mail  before  he  need  use  it.  It  can  be 
employed  either  for  local  currency  or  foreign  currency 
payments.     If  used  as  a  local  currency  credit,  it  will 


Commercial  Credit  Conference — Form  B 

IRREVOCABLE  CREDIT                    Credit  No.  B  .  . 
....  {city) 19, 


Dear  Sirs: 

We  hereby  open  our   irrevocable  credit  in  your  favor 

for  account  of 

for  a  sum  or  sums  not  exceeding  a  total  of {figures) 

{words) 

available  by  your  draft  on 

at 

to  be  accompanied  by 


evidencing  shipment  of: 


insurance  to  be  effected  by 

All  drafts  so  drawn  must  be  marked: 

"Drawn  under  ....  {issuing  hank)  ....  Bank 

Credit  No.  B , "Dated 19 

(To  be  used  when  not  all  the  documents  are  to  accompany 
draft.) 

There  must  be  forwarded  by  early  mail  to Bank 

at ,  the  following  documents:   

All  remaining  documents  must  accompany  the 

,  draft. 

The  amount  of  any  draft  drawn  under  this  credit  must, 
concurrently  with  negotiation,  be  endorsed  on  the 
reverse  hereof;  and  the  presentment  of  any  such  draft 
shall  be  a  warranty  by  the  negotiating  bank  that  such 
endorsement  has  been  made  and  that  documents  have  been 
forwarded  as  herein  required. 

This  credit  must  accompany  any  draft  which  exhausts 
the  credit  and  must  be  surrendered  concurrently  with  tne 
payment  of  such  draft. 

Each  of  the  provisions  on  the  back  hereof,  except  so  far 
as  otherwise  expressly  stated,  is  incorporated  as  part  of 
this  credit. 

We  hereby  agree  with  the  drawers,  endorsers  and 
bona  fide  holders  of  drafts  drawn  under  and  in  compliance 
with  the  terms  of  this  credit  that  the  same  shall  be  duly 
honored  on  due  presentation,  and  delivery  of  documents 
as   specified    at  if    negotiated    on    or    before 

19. •• 

Very  truly  yours, 


Figure    21.     Circular    Type    of    Irrevocable    Credit — Commercial 
Credit  Conference  Form  B 

163 


i64  AMERICAN  COMMERCIAL  CREDITS 

stipulate  that  the  beneficiary  is  to  draw  on  a  local  corre- 
spondent of  the  opening  bank,  and  presentation  of  the 
instrument  by  the  beneficiary  to  the  correspondent  is 
sufficient  authorization  for  it  to  debit  the  opening  bank's 
account,  though  it  is  customary  to  send  a  separate  advice 
of  the  opening  of  the  credit  to  the  correspondent.  All  in 
all,  it  is  more  simple  to  use  the  specially  advised  than 
the  circular  form  for  irrevocable  local  currency  credits, 
though  either  may  be  utilized. 

There  is  one  departure  from  customary  usage  in 
connection  with  this  standard  circular  form  of  irrevocable 
credit.  It  has  been  usual  to  require  the  negotiating  bank 
to  certify  that  at  the  time  of  its  negotiation  of  a  draft 
it  has  indorsed  the  amount  on  the  reverse  side  of  the 
credit  instrument,  and  that  the  documents  which  do  not 
accompany  the  draft  have  been  forwarded  as  directed  by 
the  terms  of  the  credit.  The  difficulty  with  this  procedure 
has  been  that  negotiating  bankers  have  been  careless  about 
furnishing  such  certificates.  When  the  certificate  is  lack- 
ing, the  opening  bank  is  placed  in  the  dilemma  of  either 
offending  the  negotiating  bank  by  refusing  to  honor  the 
draft  until  the  certificate  is  forthcoming,  or  of  taking 
the  risk  which  goes  with  the  waiving  of  such  omission. 
By  providing  in  the  present  form  of  credit  the  statement 
that  the  presentment  of  a  draft  for  honor  shall  be  a 
warranty  that  these  acts  have  been  performed,  the  nego- 
tiating bank  is  protected  from  its  failure  to  furnish  a 
certificate,  while  the  opening  bank  is  relieved  of  the 
duty  of  making  an  unpleasant  decision. 

Specially    Advised    Type — Commercial    Credit    Con- 
ference Forms  C-a  and  C-b 

If  the  beneficiary  is  to  be  paid  in  his  local  currency, 
the  most  convenient  way  for  the  opening  bank  to  arrange 


STANDARD  COMMERCIAL  LETTERS  OF  CREDIT  165 

to  do  so  would  be  to  instruct  a  correspondent  in  the 
domicile  of  the  beneficiary  to  pay  him  local  funds.  As 
there  is  no  question  of  a  rate  of  exchange  involved,  so 
far  as  the  beneficiary  is  concerned,  it  would  be  no  hard- 
ship to  him  to  make  the  credit  available  only  at  the 
office  of  this  correspondent.  It  would  have  the  advantage 
for  the  opening  bank  that  the  payment  might  be  at  once 
debited  to  the  local  currency  account  it  maintained  with 
the  paying  correspondent.  Such  a  credit  is  supplied  by 
Commercial  Credit  Conference  Form  C-a  (Figure  22a). 
The  difficulty  with  this  plan  is  that  beneficiaries  are 
scattered  throughout  the  country,  while  the  opening  bank 
cannot  scatter  its  accounts  in  corresponding  fashion.  It 
must,  for  economical  operation,  concentrate  its  local  cur- 
rency accounts  with  the  international  banks  in  the  large 
centers  of  foreign  trade.  The  standard  type,  represented 
by  the  Commercial  Credit  Conference  Form  C-b  (Figure 
22b)  is  a  departure  from  previous  practice  in  this  respect, 
that,  while  specially  advised,  it  is  in  the  negotiation  and  not 
the  straight-payment  form.  It,  therefore,  enables  the  open- 
ing bank  to  provide  payment  of  local  currency  out  of  a  local 
currency  account  maintained  with  a  banking  correspondent 
in  a  trade  center,  and  yet  furnish  the  beneficiary  an 
advice  of  which  he  may  avail  himself  locally,  or  present 
his  drafts  directly  to  the  notifying  bank,  as  he  prefers. 
If  the  credit  is  to  be  issued  and  the  drafts  drawn  in 
a  foreign  currency,  the  beneficiary  is  interested  in  having 
it  advised  to  him  in  a  fashion  which  will  enable  him  to 
convert  the  foreign  currency  drafts  into  his  local  funds 
to  his  best  advantage.  If  the  beneficiary  were  required 
to  present  and  surrender  the  documents  at  the  office  of 
the  notifying  correspondent,  he  would  either  have  to 
accept  payment  in  local  currency  at  the  exchange  rate  it 
quoted,  or  else  demand  its  check  in  the  foreign  currency 


Commercial  Credit  Conference — Form  C-a 

CORRESPONDENT'S  IRREVOCABLE  STRAIGHT  CREDIT 

Advice  No.  C-a 

•  ...  (city) 19.. 


Dear  Sirs: 

We  are  instructed  by (correspondent  bank) 

Bank  to  advise  you  that  they  have   opened  their  irrevo- 
cable credit  in  your  favor  for  account  of 

for  a  sum  or  sums  not  exceeding  a  total  of (figures) 

(words) 

available  by  your  drafts  on  us  at 

to  be  accompanied  by 


evidencing  shipment  of: 


insurance  to  be  effected  by 

All  drafts  so  drawn  must  be  marked : 

"Drawn  as  per  ....  (advising  bank)  ....  Bank's 

Advice  No.  C-a Dated 19 " 

Each  of  the  provisions  on  the  back  hereof,  except  so  far 
as  otherwise  expressly  stated,  is  incorporated  as  a  part  of 
this  advice. 

(correspondent    bank)  ....  Bank    engages    with 

you  that  all  drafts  drawn  under  and  in  compliance  with  the 
terms  of  this  advice  will  be  duly  honored  on  delivery  of 
documents   as    specified    if   presented   at   this  office  on  or 

before  19 

This   letter   is   solely   an    advice  of    credit  opened  by 

(correspondent  bank) Bank  and  conveys  no 

engagement  by  us. 

Very  truly  yours, 


Figure  22.  (a) Specially  Advised  Straight  Irrevocable  Credit — Com- 
mercial Credit  Conference  Form  C-a 

166 


Commercial  Credit  Conference — Form  C-b 

CORRESPONDENT'S  IRREVOCABLE  NEGOTIATION 
CREDIT  Advice  No.  C-b ... . 

....  (city) 19  . . 


Dear  Sirs: 

We  are  instructed  by  ... .  (correspondent  bank)  .... 
Bank  to  advise  you  that  they  have  opened  their  irrevocable 

credit  in  your  favor  for  account  of 

for  a  sum  or  sums  not  exceeding  a  total  of (figures) 

(words) 

available  by  your  drafts  on 

at to  be  accompanied  by 

evidencing  shipment  of: 

insurance  to  be  effected  by 

All  drafts  so  drawn  must  be  marked: 

"Drawn  as  per  ....  (advising  bank)  ....  Bank's 

Advice  No.  C-b Dated 19 " 

(To  be  used  when  not  all  the  documents  are  to  accompany 
draft.) 

There  must  be  forwarded  by  early  mail  by  the  nego- 
tiating bank  to Bank,  at (address) 

the  following  documents 

.  All  remaining  documents  must  accompany  the  draft. 

The  presentment  of  each  draft,  if  negotiated,  shall  be  a 
warranty  by  the  negotiating  bank  that  documents  have  been 
forwarded  as  herein  required,  and  that  the  amount  of  such 
draft  has  been  endorsed  on  the  reverse  hereof;  otherwise,  this 
advice  and  all  relative  documents  must  accompany  the  draft. 

This  advice  must  accompany  any  diaft  which  exhausts 
the  aedit  and  must  be  surrendered  concurrently  with  the 
payment  of  such  draft. 

Each  of  the  provisions  on  the  back  hereof,  except  so  far  as 
otherwise  expressly  stated,  is  incorporated  as  part  of  this 
advice. 

....  (correspondent  bank) Bank  engages  with 

the  drawers,  endorsers  and  bona  fide  holders  of  drafts  drawn 
under  and  in  compliance  with  the  terms  of  this  advice  that 
the  same  shall  be  duly  honored  on  due  presentation  and  de- 
livery of  documents  as  specified  if  negotiated,  or  presented  at 
,  on  or  before 19  .  . 

This  letter  is  solely  an  advice  of  credit  opened  by 
.  .  .  .  (coi  respondent  bank)  ....  Bank  and  conveys  no  engage- 
ment by  us. 

Veiy  truly  yours, 


Figure  22.     (b)  Specially  Advised  Negotiation  Irrevocable  Credit- 
Commercial  Credit  Conference  Form  C-b 


167 


1 68  AMERICAN  COMMERCIAL  CREDITS 

in  which  the  draft  is  drawn.  While  he  could  sell  the 
check  elsewhere,  he  would  nevertheless  have  to  indorse 
it  and  thus  assume  an  additional  liability. 

Whether  the  drafts  be  drawn  in  local  or  foreign 
currency,  the  type  of  credit  represented  by  Commercial 
Credit  Conference  Form  C-b  permits  the  beneficiary  to 
negotiate  his  drafts  whenever  he  may  choose,  and  if 
the  notifying  bank  becomes  the  negotiating  bank  also,  it 
is  by  voluntary  agreement  with  the  beneficiary. 

Confirmed  Irrevocable  Credit — Commercial  Credit 
Conference  Forms  D-a  and  D-b 
The  confirmed  irrevocable  credit,  the  standard  forms 
of  which  are  Commercial  Credit  Conference  Forms  D-a 
and  D-b  (Figures  23a  and  b),  conveys  exactly  the  same 
obligation  on  the  part  of  the  opening  bank  as  does  the 
irrevocable  credit  (Figures  21  and  22a  and  b),  but  in 
addition  it  carries  the  engagement  of  a  confirming  bank 
that  the  beneficiary's  drafts  will  be  honored.  If  the  con- 
firming bank  is  a  local  institution  and  the  beneficiary 
is  to  be  paid  local  currency  by  drawing  drafts  on  it, 
then  he  has  the  undertaking  of  a  bank  which  is  close 
at  hand  that  he  will  be  paid  at  the  proper  time.  If 
the  confirming  bank  is  an  institution  in  some  other  place, 
on  which  the  drafts  are  to  be  drawn  for  negotiation, 
its  undertaking  that  they  will  be  honored  on  presentation 
to  it  makes  them  more  readily  negotiable. 

Regulations 

While  the  adopted  forms  themselves  represent  in  the 
main  simply  a  refinement  and  adaptation  of  existing  prac- 
tices, the  incorporation  of  regulations  for  their  interpreta- 
tion is  a  departure.  So  long  as  there  is  no  uniform 
commercial  practice  with  regard  to  certain  questions  which 


STANDARD  COMMERCIAL  LETTERS  OF  CREDIT  169 


Commercial  Credit  Conference — Form  D-a 

CONFIRMED  IRREVOCABLE  STRAIGHT  CREDIT 

Credit  No.  D-a  . . . 

....  (,cUy) 19. 


Dear  Sirs: 

We  are  instructed  by  ... .  {correspondent  hank) 

Bank  to  advise  you  that  they  have  opened  their  irrevocable 
credit  in  your  favor  for  account  of 

for  a  sum  or  sums  not  exceeding  a  total  of {figures) 

{words) 

available  by  your  drafts  on  us  at 

to  be  accompanied  by 

evidencing  shipment  of: 


insurance  to  be  effected  by 

All  drafts  drawn  under  the  credit  must  be  marked: 

"  Drawn  under {advising  bank) Bank's 

Credit  No.   D-a ,  Dated 19 " 

Each  of  the  provisions  on  the  back  hereof,  except  so  far 
as  otherwise  expressly  stated,  is  incorporated  as  a  part  of 
this  credit. 

{correspondent  bank)   Bank  engages  with 

you  that  all  drafts  drawn  under  and  in  compliance  with  the 
terms  of  this  credit  will  be  duly  honored  on  delivery  of 
documents  as  specified  if  presented  at  this  office  on  or  before 
19  . . . . ;  we  confirm  the  credit  and  thereby  un- 
dertake that  drafts  drawn  and  presented  as  above  specified 
shall  be  duly  honored  by  us. 

Very  truly  yours, 


Figure  23.     (a)  Specially  Advised  Straight  Confirmed  Irrevocable 
Credit — Commercial  Credit  Coi5erence  Form  D-a 


Commercial  Credit  Conference — Form  D-b 

CONFIRMED  IRREVOCABLE  NEGOTIATION  CREDIT 

Credit  No.  D-b  .... 

{city) 19  . . 


Dear  Sirs: 

We  are  instructed  by  ...  .  {correspondent  bank)  .... 
Bank  to  advise  you  that  they  have  opened  their  irrevocable 

credit  in  your  favor  for  account  of 

for  a  sum  or  sums  not  exceeding  a  total  of (figures) 

(words) 

available  by  your  diafts  on 

at to  be  accompanied  by 

evidencing  a  shipment  of 

insurance  to  be  effected  by 

All  drafts  drawn  under  the  credit  must  be  marked: 
"Drawn  under  ....  (advising  bank)  ....  Bank's 

Ciedit  No.  D-b ,  Dated 10  . .  " 

(To  be  used  when  not  all  the  documents  are  to  accompany 
draft.) 
There  must  be  forwarded  by  early  mail  by  the  nego- 
tiating bank  to Bank,  at  ... .  (address) , 

the  following  documents : 

All  remaining  documents  must  accompany  the  draft. 

The  presentment  of  each  draft,  if  negotiated,  shall  be  a 
warranty  by  the  negotiating  bank  that  documents  have  been 
forwarded  as  herein  required,  and  that  the  amount  of  each 
draft  has  been  endorsed  on  the  reverse  hereof;  otherwise,  this 
credit  and  all  relative  doctunents  must  accompany  the  diaft. 
This  credit  must  accompany  any  draft  which  exhausts 
the  credit  and  must  be  surrendered  concurrently  with  the 
payment  of  such  draft. 

Each  of  the  provisions  on  the  back  hereof,  except  so  far 
as  otherwise  expressly  stated,  is  incorporated  as  part  of  this 
credit. 

....  (correspondent  bank) ....  Bank  engages  with  the 
drawers,  endorsers  and  bona  fide  holders  of  drafts  drawn  under 
and  in  compliance  with  the  terms  of  this  advice  that  the  same 
shall  be  duly  honored  on  due  presentation  and  delivery  of  docu- 
ments as  specified,  if  negotiated,  or  presented  at , 

on  or  before 19  . . ;  we  confirm  the  credit  and  thereby 

undertake  that  drafts  drawn  and  presented  as  above  specified 
shall  be  duly  honored. 

Very  truly  yours, 


Figure  23.     (b)  Specially  Advised  Negotiation  Confirmed  Irrevocable 
Credit — Commercial  Credit  Conference  Form  D-b 

170 


STANDARD  COMMERCIAL  LETTERS  OF  CREDIT  i^i 

constantly  arise  in  connection  with  commercial  credit 
operations,  it  was  considered  advisable  by  the  Commercial 
Credit  Conference  to  continue  the  practice  of  indicating 
the  interpretation  that  would  be  made  in  the  absence  of 
contrary  instructions. 

Standard  Commercial  Credit  Regulations 

A.  (i)  Railroad  export  and  forwarders*  bills  of  lading  will 
not  be  accepted. 

Foreign  trade  quotations  and  practices  have  grown  up 
around  the  use  of  a  contract  of  carriage  issued  by  an 
ocean  carrier  as  a  basic  shipping  document.  As  the  use 
of  railroad  export  or  forwarders'  bills  of  lading  does 
not  conform  to  the  general  custom,  their  acceptance  should 
be  specifically  authorized. 

(2)  Ocean  bills  of  lading  permitting  transhipment  will  be 
accepted. 

When  the  contract  of  sale  is  on  a  cost,  insurance,  and 
freight  basis,  the  seller  is  entitled  to  select  the  route; 
where  on  a  free-on-board  basis  the  buyer  has  that  right, 
but  if  he  fails  to  exercise  it  by  designating  the  route  the 
seller  becomes  his  agent  for  the  purpose.  So  long  as 
this  selection  is  made  with  ordinary  care,  it  is  justified, 
even  though  it  provides  for  transshipment. 

B.  (i)  Bills  of  lading  shall  contain  no  words  qualifying  the 
acceptance  of  shipments  in  apparent  good  order  and  condition. 

The  insertion  of  rubber-stamped  notations  with  refer- 
ence to  the  condition  of  the  merchandise  or  its  container 
in  bills  of  lading  is  made  by  the  steamship  company  to 
afford  a  basis  for  a  defense  against  claim   for  damage 


172  AMERICAN  COMMERCIAL  CREDITS 

during  transit.  If  the  use  of  the  qualifying  phrases  is 
unwarranted,  the  shipper  should  insist  upon  their  removal 
from  the  bill  of  lading  and  if  their  use  is  warranted  it  is 
apparent  that  an  irregularity  exists. 

(2)  "Received  for  shipment"  or  "alongside"  bills  of  lading 
will  be  accepted  and  the  date  thereof  taken  to  be  the  date  of- 
shipment,  and  in  this  case  insurance  shall  cover  the  shipment  from 
such  date  of  shipment  and  on  whatever  vessels  carried. 

The  use  of  this  clause  is  necessitated  by  the  present 
uncertainty,  both  as  regards  what  constitutes  a  bill  of 
lading  and  what  constitutes  shipment. 

(3)  When  "on  board"  shipment  is  required  and  such  shipment 
is  represented  by  an  "on  board"  bill  of  lading  the  bill-of-lading 
date  will  be  taken  as  the  date  when  such  shipment  was  effected; 
if  evidenced  by  "on  board"  endorsement,  the  endorsement  date  will 
be  so  taken. 

The  use  of  this  clause  is  necessitated  by  the  present 
uncertainty  with  regard  to  the  interpretation  of  the  term 
"shipment." 

(4)  Any  extension  of  the  date  of  shipment  shall  extend  for  an 
equal  length  of  time  the  date  for  presentation  or  negotiation,  and 
vice  versa. 

This  clause  is  intended  to  cover  the  extension  of  the 
date  of  expiration  of  a  credit  which  originally  contained 
both  an  expiration  date  and  a  shipping  date,  when  the 
amended  instructions  are  silent  with  reference  to  the 
extension  of  the  shipping  date  to  correspond  to  the 
extended  life  of  the  credit  itself. 

C.  The  term  "insurance"  shall  be  construed  as  including  un- 
derwriter's certificate  of  insurance. 


STANDARD  COMMERCIAL  LETTERS  OF  CREDIT  173 
This  clause  is  necessitated  by  a  recent  English  decision. 

D.  A  shipment  for  any  part  of  the  specified  property  may  be 
drawn  against,  if  the  pro  rata  value  can  be  verified. 

Intended  to  prevent  misunderstanding  with  regard  to 
partial  shipment. 

E.  If  shipment  in  installments  within  stated  periods  is  specified, 
and  there  is  a  failure  to  ship  in  any  designated  period,  shipments 
of  subsequent  installments,  made  in  their  respective  designated 
periods,  may  be  drawn  against. 

This  provision  is  desirable  in  view  of  the  conflict  of 
laws  in  various  jurisdictions  with  regard  to  instalment 
shipments. 

F.  When  the  indicated  expiration  date  for  presentation  or 
negotiation  falls  upon  a  Sunday  or  legal  holiday,  the  expiration 
is  extended  to  the  next  succeeding  business  day. 

This  provision  is  desirable  in  view  of  the  conflict  of 
laws  in  various  jurisdictions  wth  regard  to  the  expiration 
of  an  obligation  maturing  on  a  Sunday  or  holiday. 

G.  Presentation  must  be  made  during  the  usual  banking  hours. 

Intended  to  prevent  an  attempt  on  the  part  of  a  bene- 
ficiary to  present  documents  on  the  expiration  date  at  a 
time  after  the  usual  banking  hours  and  after  it  is 
impossible  to  complete  the  banking  operation  involved. 

H.  The  terms  "prompt  shipment,"  "shipment  as  soon  as  pos- 
sible," "immediate  shipment"  or  words  of  similar  import  shall 
be  interpreted  as  requiring  shipment  to  be  effected  within  thirty 
days ;  and  if  no  date  for  presentation  or  negotiation  is  stated  such 
presentation  or  negotiation  must  be  made  within  thirty  days  from 
the  date  of  the  credit  or  advice. 


174  AMERICAN  COMMERCIAL  CREDITS 

Intended  to  fix  a  workable  rule  with  regard  to  the 
interpretation  of  what  are  otherwise  controversial  terms. 

I.  Documents  representing  more  than  the  specified  quantity  of 
property  may  be  accepted  in  the  discretion  of  the  paying  or 
negotiating  bank  without  thereby  binding  the  buyer  to  accept  or 
pay  for  such  excesses  but  payment  shall  be  limited  to  the  sum 
named  in  the  credit  or  advice. 

In  many  classes  of  goods  it  is  obviously  impossible 
to  deliver  an  exact  quantity,  and  a  credit  which  does  not 
permit  some  latitude  in  this  direction  may  unduly  em- 
barrass the  beneficiary.  On  the  other  hand,  the  attempt 
to  fix  an  arbitrary  percentage  of  variation  would  invite 
an  unscrupulous  beneficiary  to  present  the  minimum 
quantity  in  the  case  of  a  rise  in  price  and  the  maximum 
quantity  in  the  case  of  a  fall.  The  best  solution  of  this 
problem  appeared  to  be  to  permit  the  paying  or  negotiat- 
ing bank  to  exercise  its  best  judgment  in  the  circum- 
stances, thus  giving  it  latitude  to  inquire  into  the  custom 
of  the  trade  and  also  to  examine  the  terms  of  the  con- 
tract of  sale  on  that  point,  if  it  so  desires. 

J.  The  terms  "approximately,"  "about,"  or  words  of  similar 
import,  shall  be  construed  to  permit  a  variation  of  not  exceeding 
ten  per  centum  from  the  named  sum  or  quantity. 

This  clause  is  used  to  prevent  controversy  as  to  the 
maximum  variation  permitted  by  the  use  of  the  terms 
indicated.  : 

K.  Drafts  drawn  without  recourse  will  not  be  honored. 

The  necessity  for  this  clause  is  explained  in  Chapter 
XIII,  "Recourse  Against  the  Beneficiary." 

L.  Definitions  of  Export  Quotations  will  be  those  adopted  by 
the  National  Foreign  Trade  Cotmcil,  Chamber  of  Commerce  of  the 


STANDARD  COMMERCIAL  LETTERS  OF  CREDIT  I7S 

U.  S.  A.,  National  Association  of  Manufacturers,  American 
Manufacturers'  Export  Association,  Philadelphia  Commercial 
Museum,  American  Exporters  and  Importers  Association, 
Chamber  of  Commerce  of  the  State  of  New  York,  New  York 
Produce  Exchange  and  the  Merchants'  Association  of  New  York 
at  a  conference  held  in  India  House,  New  York,  on  December 
i6,  1919. 

Intended  to  prevent  disputes  with  regard  to  the  inter- 
pretation of  the  terms  usually  employed  in  making  export 
quotations. 

While  the  use  of  regulations  in  connection  with 
specially  advised  credits,  of  which  American  banks  are 
the  paying  agents,  has  been  in  vogue  since  the  adoption 
of  the  Regulations  of  1920,  there  was  considerable  opposi- 
tion on  the  part  of  the  American  bankers  to  a  suggestion 
that  regulations  now  be  incorporated  in  the  negotiation 
forms  as  well.  Their  opposition  was  based  on  the  claim 
that  the  presence  of  regulations  in  circular  negotiation 
credit  instruments  would  make  negotiating  bankers  reluc- 
tant to  cash  the  beneficiaries'  drafts.  It  would  seem, 
however,  to  go  without  proving  that  a  bank  which  negoti- 
ates drafts  in  connection  with  commercial  credits  would 
profit  by  knowing,  at  the  time  of  negotiation,  the  inter- 
pretation that  would  be  placed  by  the  bank  issuing  the 
credit  and  its  customer  upon  matters  which  are  now  the 
subject  of  dispute  and  litigation.  It  was  the  very  absence 
of  knowledge  of  the  interpretation  which  American  banks 
would  put  upon  received- for-shipment  bills  of  lading, 
resulting  from  the  omission  of  any  regulation  on  that 
point  in  American  bankers'  import  credits,  which  caused 
Shanghai  and  Batavia  bankers  to  cease  negotiating  drafts 
drawn  thereunder  in  the  autumn  of  1920.  The  mere 
adoption  of  the  standard  forms  will  not  result  in  the 
prevention  of  a  recurrence  of  the  wave  of  disputes  that 


176  AMERICAN  COMMERCIAL  CREDITS 

arose  in  connection  with  this  type  of  credit  during  the 
falling  market  of  1920,  so  long  as  recourse  must  still  be 
had  to  litigation  to  determine  the  meaning  of  the  phrase- 
ology employed.  It  is  rather  a  reflection  on  the  intelli- 
gence of  bankers  generally  to  assume  that  they  would 
regard  the  presence  of  rules,  which  are  intended  to  pre- 
vent the  possibility  of  misunderstanding,  as  an  obstacle 
to  negotiation,  and  it  is  expected  that  the  inclusion  of 
the  regulations  will  be  regarded,  in  the  long  run,  as  more 
helpful  than  harmful. 


CHAPTER  XII 

COMMERCIAL  CREDIT  ACCOUNTING 

Value  of  the  Accounting  Viewpoint 

We  have  seen  that  the  commercial  letter  of  credit 
derives  its  effectiveness  from  the  fact  that  some  party 
to  it,  in  some  fashion  and  at  some  time,  assumes  a  liability, 
either  to  the  beneficiary,  or  to  bona  fide  holders  of  the 
beneficiary's  drafts,  or  to  both.  The  success  of  any  attempt 
to  improve  commercial  letter  of  credit  forms  must  be 
measured  by  the  extent  to  which  the  identity  of  these 
obligated  parties,  and  the  nature  of  their  obligations,  are 
thrown  into  clear  relief.  There  is  no  better  way  to  arrive 
at  a  conclusion  concerning  the  extent  to  which  the  newly 
adopted  standard  forms  have  attained  this  end  than  to 
consider  how  bankers  must  handle  them  from  the  account- 
ing viewpoint.  If  we  can  with  ease  determine  the  source 
and  the  exact  nature  of  the  liability  which  the  bankers 
must  show  in  their  books  of  account,  the  objective  has 
been  attained.  Let  us  therefore  consider  the  standard 
forms,  to  see  how  the  liabiHty  they  evidence  is  to  be 
set  up. 

Authority  to  Pay 

The  credit  represented  by  the  authority  to  pay  is 
advised  to  the  seller  by  the  notifying  bank  on  behalf  of 
the  opening  bank  without  obligation  on  the  part  of  either 
bank.  At  the  time  of  advice  the  notifying  bank  need 
therefore  set  up  no  liabiHty  on  its  books,  for  it  has  under- 
taken  no   commitment.      It   is   in   fact   the   practice   of 

»2  177 


178  AMERICAN  COMMERCIAL  CREDITS 

notifying  banks  not  to  set  up  any  liability.  Neither  is 
the  credit,  until  utilized,  the  actual  commitment  of  the 
opening  bank.  However,  it  may  become  an  actual  liability 
of  the  opening  bank  to  the  notifying  bank  upon  utiliza- 
tion by  the  beneficiary,  and  as  this  contingency  may  occur 
without  its  immediate  knowledge,  this  liability  in  such 
case  should  from  the  outset  be  reflected  in  its  books,  as 
well  as  in  those  of  the  accredited  buyer,  as  an  actual 
liability.  Whether  any  actual  liability  arises  on  the  part 
of  the  opening  bank  to  the  notifying  bank  will  depend 
upon  the  method  of  reimbursement. 

1.  Payment  Type.  When  the  beneficiary  presents 
his  draft  to  the  notifying  bank  for  payment,  according  to 
the  terms  of  the  authority,  the  situation  of  the  parties  is 
somewhat  altered.  If  the  opening  bank  maintains  an 
account  in  local  currency  with  the  paying  bank,  and  if 
the  agreement  between  them  so  stipulates,  the  paying  bank 
upon  cashing  the  beneficiary's  draft  reimburses  itself  by 
debiting  the  account.  The  commitment  of  the  buyer  is 
then  converted  into  an  actual  liability  to  the  opening 
bank  to  reimburse  it  for  the  payment  it  has  made  through 
its  correspondent.  The  neutral  position  of  the  paying 
bank  is  unchanged,  as  it  has  not  paid  out  its  own  funds. 

2.  Reimbursement  Type.  However,  it  may  be  that 
the  opening  bank  does  not  maintain  a  local  currency 
account  with  the  paying  bank;  or,  if  it  does,  it  may  be 
that  it  prefers  not  to  have  the  account  charged.  To  see 
why  a  bank  may  have  any  preference  in  this  matter, 
let  us  consider  a  London  bank  which  is  opening  a  credit 
in  New  York  at  a  time  when  the  trend  of  exchange 
between  these  centers  is  against  London.  If  a  debit  is 
made  at  the  time  of  shipment  by  the  New  York  bank  to 
the  dollar  account  of  the  London  bank,  the  obligation  of 
the  English  buyer  will  be  to  replace  those  dollars.     This 


COMMERCIAL  CREDIT  ACCOUNTING  i79 

he  will  do  by  covering  them  in  sterling  at  the  London 
cable  rate  on  New  York  current  on  the  day  of  receipt  of 
mail  advice  in  London  of  the  debit  which  has  been  made 
in  New  York,  plus  interest  for  the  time  the  mail  advice 
has  been  in  transit.  If,  however,  the  New  York  bank, 
instead  of  debiting  the  London  bank's  dollar  account,  is 
content  to  advance  the  funds,  it  can  give  the  buyer  the 
benefit,  in  an  exchange  market  which  is  running  against 
him,  of  an  earlier  conversion.  The  New  York  bank  will 
immediately  convert  the  dollar  payment  into  sterling  at 
the  New  York  bank's  selling  rate  on  that  date  for  checks 
on  London.  It  then  debits  its  own  sterling  account  with 
the  equivalent  of  the  dollars  paid  out  and  draws  on  the 
opening  bank  for  that  amount  through  the  London  bank 
in  which  its  sterling  account  is  maintained. 

When  there  is  such  an  arrangement,  the  issuance  of 
the  authority  to  pay  creates  a  contingent  liability  on  the 
part  of  the  opening  bank  to  reimburse  the  paying  bank 
for  its  outlay.  No  actual  liability  need,  theoretically,  be 
set  up  on  the  books  of  the  opening  bank  until  the  day 
the  notifying  bank  makes  the  payment.  Until  then  it 
could  be  shown  as  a  contingent  liability,  except  for  the 
practical  difficulty  that  both  here  and  in  the  case  of  the 
liability  of  the  buyer  to  reimburse  the  opening  bank  in 
turn,  it  becomes  an  actual  liability  without  their  knowl- 
edge. It  is  prudent,  therefore,  as  it  is  usual,  to  show 
it  as  an  actual  liability  from  the  outset. 

Inter-Bank  Form  A — Authority  to  Pay 

To  set  forth  and  define  with  exactitude  the  relation- 
ship created  between  the  opening  bank  and  the  notifying 
bank  in  connection  with  the  issuance  of  an  advice  of 
authority  to  pay,  the  Commercial  Credit  Conference  has 
recommended  the  use  of  the  form  shown  in  Figure  24 


Commercial  Credit  Conference — Inter-bank  Form  A 
AUTHORITY  TO  PAY  Authority  No.  A 

{correspondent  bank) , 19 ...  , 

{city) 

Dear  Sirs: 

We  request  you  to  advise {name) 


{address) {city) {state) 

that  we  have  authorized  you  to  honor  their  drafts  for  account 
of 

for      a      sum     or      sums     not      exceeding      a     total      of 

{figures) 

{words) 

on  you  at 

to  be  accompanied  by 


evidencing  shipment  of: 

insurance  to  be  effected  by 

This  authority  is  vaHd  for  drafts  so  drawn,  with  docu- 
ments as  specified,  presented  at  your  office  not  later  than 
19 ,  unless  it  is  previously  revoked  or  modi- 
fied by  receipt  by  you  of  notice  from  us  to  that  effect. 
For  your  reimbursement  you  may: 
(Put  cross  in  square     D  Debit  our  account  with  you. 

opposite  method     D  Draw  on  us  at 

desired) 
This  authority  is  to  be  advised  to  the  beneficiary  by 
you  on  Commercial  Credit  Conference  Form  A. 


Yours  very  truly, 


Figure  24.     Commercial  Credit  Conference— Inter-bank    Form  A 

(Authority  to  Pay — Advice  from  Opening  Bank  to  Paying 

Bank) 


180 


COMMERCIAL  CREDIT  ACCOUNTING  i8i 

and  entitled  "Commercial  Credit  Conference — Inter-bank 
Form  A." 

Inter-Bank  Forms  C-a  and  C-b — Irrevocable  Credit 

Let  us  now  consider  whether  the  liability  of  the 
various  parties  is  altered  by  the  use  of  the  irrevocable 
credit.  Such  a  credit  is  a  contingent  obligation  of  the 
opening  bank  to  the  beneficiary  from  the  date  of  issuance 
until  the  date  of  expiration  or  exhaustion.  Practically, 
as  the  date  of  conversion  from  contingent  to  actual  lia- 
bility, which  may  occur  when  it  is  utilized  by  the  bene- 
ficiary, is  uncertain,  such  a  credit  is  carried  as  an  actual 
liability  of  the  opening  bank  and  of  the  accredited  buyer 
from  the  outset. 

1.  Negotiation  Type.  If  the  credit  is  issued  in  the 
circular  negotiation  form,  or  Commercial  Credit  Confer- 
ence Form  B  (Figure  21),  stipulating  that  the  drafts  are 
to  be  drawn  in  a  foreign  currency,  the  situation  of  a 
negotiating  bank  and  of  the  opening  bank  and  the 
accredited  buyer  are,  after  negotiation,  in  every  respect 
identical  with  that  which  exists  in  any  kind  of  reimburse- 
ment credit,  after  payment.  There  is  an  actual  liability 
on  the  part  of  the  opening  bank  to  honor  the  negotiated 
draft,  and  on  the  part  of  the  accredited  buyer  to  furnish 
it  the  necessary  funds.  And  while  this  liability  only 
becomes  actual  as  drafts  are  negotiated,  it  is  prudent  and 
customary  as  a  practical  matter  to  consider  the  liability 
as  actual  from  the  outset,  as  it  may  in  fact  become  con- 
verted from  a  contingent  to  an  actual  liability  without 
the  knowledge  of  the  obligors. 

2.  Specially  Advised  Type.  As  the  negotiating  bank 
enters  into  the  transaction  voluntarily,  on  the  strength 
of  the  credit  instrument,  there  is  no  occasion  for  an 
inter-bank  form  in  connection  with  the  negotiation  type 


i82  AMERICAN  COMMERCIAL  CREDITS 

of  the  irrevocable  credit.  However,  if  the  specially 
advised  form  as  shov^^n  in  Commercial  Credit  Conference 
Forms  C-a  and  C-b  (Figures  22a  and  22b)  is  utilized, 
there  is  need  for  an  inter-bank  communication  for  which 
Commercial  Credit  Conference  Inter-Bank  Forms  C-a  and 
C-b  (Figures  25a  and  25b)  is  recommended. 

The  notifying  bank,  if  the  specially  advised  form  of 
irrevocable  credit  is  used,  carries  the  same  neutral  relation 
to  it  at  the  time  of  issuance  as  to  the  advice  of  authority 
to  pay.  Similarly,  if  local  currency  drafts  are  paid  by 
it  to  the  debit  of  the  opening  bank's  account,  its  position 
remains  neutral;  while,  if  it  draws  in  reimbursement  or 
negotiates  drafts  in  foreign  currency,  the  opening  bank 
comes  under  an  obligation  to  it  as  well  as  to  the  bene- 
ficiary. 

Inter-Bank  Forms  D-a  and  D-b — Confirmed  Irrevoca- 
ble Credit 

If  the  confirmed  irrevocable  credit  (Commercial  Credit 
Conference  Forms  D-a  and  D-b)  (Figures  23a  and  23b) 
is  employed,  this  type,  from  the  accounting  standpoint, 
simply  adds  to  the  irrevocable  credit  the  contingent 
obligation  of  the  confirming  bank  to  the  beneficiary, 
from  the  date  of  issuance  until  the  date  of  ex- 
piration or  exhaustion.  If  the  drafts  drawn  in  con- 
nection with  a  confirmed  irrevocable  credit  are  sight 
drafts,  to  be  debited  to  the  account  of  the  opening  bank 
by  the  confirming  bank,  the  liability  of  the  opening  to 
the  confirming  bank  is  at  once  terminated  by  payment, 
and  that  of  the  accredited  buyer  to  the  opening  bank  is 
the  same  as  in  the  authority  to  pay.  In  the  event  of 
failure  to  pay,  the  beneficiary's  remedy  is  against  the 
confirming  bank  as  well  as  the  opening  bank.  The  form 
of   inter-bank  agreement  recommended   for   use  in  this 


Commercial  Credit  Conference — Inter-bank  Form  C-a 
IRREVOCABLE  STRAIGHT  CREDIT 

Credit  No.  C-a 

19     •• 

(correspondent  bank) 

(city)  

Dear  Sirs: 

We  request  you  to  advise (name) 

(address) (city) (state) 

that  we  have  opened  our  irrevocable  credit  in  their  favor 
for  account 

of 

for  a  sum  or  sums  not  exceeding  a  total  of (figures) 

(words) 

available  by  their  drafts  on  you  at 

to  be  accompanied  by 

evidencing  shipment  of: 

insurance  to  be  effected  by 

We  engage  with  the  beneficiary  that  all  drafts  drawn 
under  and  in  compliance  with  the  terms  of  the  advice  will 
be  duly  honored  on  deHvery  of  documents  as  specified  if 

presented  at  your  office  on  or  before 19 

For  your  reimbursement  you  may: 

(Put  cross  in  square    □  Debit  our  account  with  you. 

opposite  method     □  Draw  on  us  at 

desired) 
This  credit  is  to  be  advised  to  the  beneficiary  by  you 
on  Commercial  Credit  Conference  Form  C-a. 

Yours  very  truly, 


Figure  25.  (a)  Commercial  Credit  Conference — Inter-bank  Form  C- 
( Specially  Advised  Straight  Irrevocable  Credit — Advice  from 
the  Opening  Bank  to  the  Notifying  Bank) 

183 


Commercial  Credit  Conference — Inter-bank  Form  C-b 

IRREVOCABLE  NEGOTIATION  CREDIT 

Credit  No.  C-b 

19  .... 

....  {correspondent  hank)  .... 
{city)  

Dear  Sirs: 

We    request    you    to    advise {name) 

{address) {city)   {state)   

that  we  have  opened  our  irrevocable  credit  in  their  favor  for 

account  of 

for  a  sum  or  sums  not  exceeding  a  total  of {figures) 

{words) 

available  by  their  drafts  on (if  on  accredited  buyer, 

without  recourse)  at 

to  be  accompanied  by 

evidencing  shipment  of 

insurance  to  be  effected  by 

'  To  be  used  when  not  all  the  documents  are  to  accompany 
draft. 
There  must  be  forwarded  by  early  mail  by  the  nego- 
tiating bank  to  ....  at ,  the  following  documents 

All  remaining  documents  must  accompany 

the  draft. 

We  engage  with  the  drawers,  endorsers  and  bona  fide 
holders  of  drafts  drawn  under  and  in  compliance  with  the 
terms  of  the  advice  that  the  same  shall  be  duly  honored  on 
due  presentation  and  delivery  of  documents  as  specified,  if 

negotiated  or  presented  at  ....  on  or  before 19  .... 

If  the  terms  of  the  advice  authorize  the  beneficiary  to 
draw  on  you,  for  your  reimbursement,  you  may: 

(Put  cross  in  square  D  Debit  our  account  with  you. 

opposite      method  D  Draw  on  us  at 

desired) 

This  credit  is  to  be  advised  to  the  beneficiary  by  you  on 
Commercial  Credit  Conference  Form  C-b. 

Yours  very  truly, 


Figure  25.  (b)     Commercial  Credit  Conference — Inter-bank  Form 

C-b     (Specially    Advised    Negotiation    Irrevocable    Credit — 

Advice  from  the  Opening  Bank  to  the  Notifying  Bank) 

184 


COMMERCIAL  CREDIT  ACCOUNTING  185 

connection  is  the  Commercial  Credit  Conference  Inter- 
Bank  Forms  D-a  and  D-b  (Figures  26a  and  26b). 

Acceptance  Credit 

If  the  drafts  are  drawn,  at  time,  for  acceptance,  the 
situation  is  somewhat  altered.  If  they  are  drawn  on  a 
confirming  bank,  by  accepting  them  the  bank  becomes 
primarily  liable  to  bona  fide  holders  for  payment  of  them 
at  maturity ;  if  the  drafts  are  drawn  directly  on  the  open- 
ing bank,  by  accepting  them  it  assumes  the  same  liability 
as  the  confirming  bank  in  the  first  case. 

This  brings  us  to  an  interesting  question.  Has  the 
accepting  bank,  by  actually  accepting  the  drafts  which, 
as  the  opening  or  confirming  bank,  it  had  already  legally 
committed  itself  to  accept,  altered  its  liability  in  any 
fashion?  The  Federal  Reserve  Board,  by  a  ruling  of  its 
law  department,  which  appears  in  the  Federal  Reserve 
Bulletin  of  July,  192 1,  differentiated  these  liabilities  thus: 

A  member  bank  may  issue  a  letter  of  credit  by  which  it 
agrees  within  a  specified  time,  which  may  be  more  than  six 
months,  to  accept  drafts  aggregating  certain  amounts,  although 
each  individual  draft  drawn  under  the  credit  must  not  have  a 
maturity  of  more  than  six  months.  Similarly,  it  would  seem  that 
a  member  bank  may  issue  a  letter  of  credit,  the  aggregate  amount 
of  which  may  be  in  excess  of  the  50  per  cent  or  100  per  cent  of  the 
bank's  capital  and  surplus,  provided  that  the  aggregate  amount  of 
the  acceptances  made  under  the  letter  of  credit  and  outstanding 
at  any  one  time  does  not  exceed,  in  addition  to  the  bank's  other 
outstanding  acceptances,  the  aggregate  limitation  upon  acceptances 
prescribed  in  section  13. 

Since  the  acceptance  liability  is  of  a  different  nature 
from  that  assumed  by  the  agreement  to  accept,  it  must 
be  set  up  in  some  other  way.  It  is  customary  to  reflect 
it  by  debiting  the  amount  of  each  acceptance,  as  made, 


Commercial  Credit  Conference — Inter-bank  Form  D-a 

CONFIRMED     IRREVOCABLE    STRAIGHT    CREDIT 

Credit  No.  D-a 

,     19  .... 

(correspondent  bank) 

(city)  

Dear  Sirs : 

We  request  you  to  advise (name) 

(address) (city) (state) 

that  we  have  opened  our  irrevocable  credit  in  their  favor 
for  account  of: 

for  a  sum  or  sums  not  exceeding  a  total  of (figures) 

(words) 

available  by  their  drafts  on  you  at 

to  be  accompanied  by 

evidencing  shipment  of: 

insurance  to  be  effected  by 

We  engage  with  the  beneficiary  that  all  drafts  drawn 
under  and  in  compliance  with  the  terms  of  the  credit  will 
be  duly  honored  on  delivery  of  documents  as  specified  if 

presented  at  your  office  on  or  before  19  . . .  . ;  we 

authorize  you  to  confirm  the  credit  and  thereby  to  imder- 
take  that  drafts  drawn  and  presented  as  above  specified 
shall  be  duly  honored  by  you. 

For  your  reimbursement  you  may: 

(Put  cross  in  square    D  Debit  our  account  with  you. 

opposite  method     D  Draw  on  us  at 

desired) 
This  credit  is  to  be  advised  to  the  beneficiary  by  you 
on  Commercial  Credit  Conference  Form  D-a. 

Yours  very  truly, 


Figure  26.  (a)  Commercial  Credit  Conference — Inter-bank  Form  D-a 

(Specially  Advised  Straight  Confirmed  Irrevocable  Credit — 

Advice  from  Opening  to  Confirming  Bank) 

186 


Commercial  Credit  Conference — Inter-bank  Form  D-b 

CONFIRMED  IRREVOCABLE  NEGOTIATION  CREDIT 

Credit  No.  D-b 

19   ••• 

....  (correspondent  bank) 

(City) 

Dear  Sirs: 

We    request    you    to    advise (name) 

(address) (city) ^.  .  (state) 

that  we  have  opened  our  irrevocable  credit  in  their  favor  for 
account  of: 

for  a  sum  or  sums  not  exceeding  a  total  of (figures) 

(words) 

available  by  their  drafts  on (if  on  accredited  buyer, 

without  recourse)  at 

to  be  accompanied  by 

evidencing  shipment  of: 

insurance  to  be  effected  by 

To  be  used  when  not  all  the  documents  are  to  accompany 
the  draft. 
There  must  be  forwarded  by  early  mail  by  the  nego- 
tiating bank  to  ....  at ,  the  following  documents 

All  remaining  documents  must  ac- 
company the  draft. 

We  engage  with  the  drawers,  endorsers  and  bona  fide 
holders  of  drafts  drawn  under  and  in  compliance  with  the 
terms  of  the  credit  that  the  same  shall  be  duly  honored  on 
due  presentation  and   delivery  of  documents   as  specified 

if  negotiated  or  presented  at on 

or  before I9-  • ;  we  authorize  you  to  confirm  the 

credit  and  thereby  to  undertake  that  drafts  drawn  and  pre- 
sented as  above  specified  shall  be  duly  honored.  If  the  terms 
of  the  credit  authorize  the  beneficiary  to  draw  on  you,  for  your 
reimbursement  you  may : 

(Put   cross   in   square        D  Debit  our  account  with  you. 

opposite        method        D  Draw  on  us  at 

desired) 

This  credit  is  to  be  advised  to  the  beneficiary  by  you  on 
Commercial  Credit  Conference  Form  D-b. 

Yours  very  truly, 


Figure  26.  (b)  Commercial  Credit  Conference — Inter-bank  Form 
D-b  (Specially  Advised  Negotiation  Confirmed  Irrevocable 
Credit — Advice  from  Opening  Bank  to  Confirming  Bank) 

187 


1 88  AMERICAN  COMMERCIAL  CREDITS 

to  an  account  bearing  some  title  as  "Our  Acceptances 
under  Commercial  Credits."  If  the  accepting  bank  is 
other  than  the  opening  bank,  the  opening  bank,  at  the 
same  time,  assumes  an  actual  liability  to  put  the  accepting 
bank  in  funds  to  pay  the  drafts  at  maturity.  This  liability 
is  shown  on  the  asset  side  of  the  accepting  bank's  state- 
ment under  some  such  title  as  "Customers'  Liability 
under  Commercial  Credits."  The  opening  bank's  liability 
to  the  accepting  bank  is  carried  on  the  liability  side  of 
its  ledger  under  some  such  caption  as  "Acceptances  of 
Foreign  Correspondents  under  Commercial  Credits,"  and 
is  offset  by  an  item  on  the  asset  side  under  some  such 
title  as  "Customers'  Liability  under  Commercial  Credits." 
This  latter  account  reflects  the  liability  of  the  accredited 
buyer  to  the  opening  bank,  which  the  buyer  must  in  turn 
show  as  a  liability  on  his  books. 

Anticipated  Payment 

Delivery  of  the  documents  in  connection  with  an 
acceptance  credit  is  made  by  the  opening  bank  to  an 
accredited  buyer  whose  standing  is  not  beyond  question, 
only  against  payment.  If  the  buyer  has  resold  the  goods 
and  obligated  himself  to  deliver  them  prior  to  the  date 
at  which  the  acceptance  matures,  he  will  find  it  necessary, 
in  order  to  get  possession  of  the  goods,  to  make  immediate 
payment  of  the  funds  which  he  has  agreed  to  put  into 
the  hands  of  the  opening  bank  at  maturity. 

If  for  this,  or  any  other  reason,  the  accredited  buyer 
pays  in  the  funds  to  liquidate  acceptances  in  advance  of 
this  maturity,  are  the  funds  so  paid  in  to  be  regarded 
simply  as  a  deposit  ?  They  might,  for  instance,  be  treated 
as  a  time  deposit  of  a  duration  equivalent  to  the  period 
the  acceptances  had  still  to  run,  on  which  interest  might 
be  credited  at  the  rate  permitted  on  similar  time  deposits. 


AMERICAN  CREDIT  ACCOUNTING  189 

It  is  more  logical,  however,  to  receive  the  money  as  in 
full  or  part  payment  of  the  customer's  obligation  to  put 
the  bank  in  funds  at  the  maturity  of  the  acceptance.  If 
the  money  is  received  on  this  understanding,  solely  to 
be  applied  in  payment  of  the  acceptance  at  maturity,  it 
is  obvious  that  the  customer's  liability  may  be  taken  from 
his  books  and  that  the  opening  bank  must  wipe  out  its 
corresponding  entry  in  the  account,  "Customers'  Liability 
under  Commercial  Credits."  If  the  opening  bank  has 
not  made  the  acceptance,  and  it  in  turn  remits  the  money 
to  the  accepting  bank,  that  bank  must  also  extinguish  the 
corresponding  item  it  has  carried  under  "Customers'  Lia- 
bility under  Commercial  Credits."  It  is  because  of  such 
operations  as  this  that  the  item,  "Customers'  Liability  under 
Commercial  Credits,"  often  appears  on  bank  statements 
at  a  figure  somewhat  below  the  outstanding  acceptances. 

Rebate  Interest 

The  accredited  buyer  who  has  placed  funds  in  the 
hands  of  his  bank  prior  to  the  date  on  which  the  bank 
is  under  obligation  to  dispose  of  them,  is,  of  course, 
entitled  to  earn  interest  on  the  funds  thus  placed  at  the 
bank's  use.  If  the  bank  could  locate  the  holder  of  the 
acceptance  in  question,  and  he  were  prepared  to  sell  it, 
the  bank  could  buy  it  at  the  current  rate  and  cancel  it. 
Practically  the  same  result  could  be  obtained  by  purchas- 
ing any  other  of  its  outstanding  acceptances.  It  is  not 
often  perhaps  that  the  accepting  bank  actually  applies  the 
specific  deposit  to  that  purpose,  but  it  is  the  possibility 
of  doing  so  which  fixes  the  rate.  The  rebate  is  conse- 
quently calculated  at  J4  per  cent  below  the  selling  rate 
for  the  bank's  acceptances  of  corresponding  maturity. 
The  5/2  per  cent  compensates  the  bank  for  the  trouble 
to  which  it  is  put  in  reinvesting  its  funds. 


CHAPTER  XIII 

RECOURSE  AGAINST  THE  BENEFICIARY 

A  Popular  Misunderstanding 

Sooner  or  later  it  occurs  to  every  merchant  who 
draws  drafts  in  availing  himself  of  a  commercial  letter 
of  credit,  to  inquire  what  recourse,  if  any,  exists  against 
him  as  drawer.  Sometimes  he  directs  his  question  to  a 
fellow-merchant;  usually  he  interrogates  his  bank;  occa- 
sionally he  seeks  the  advice  of  counsel.  The  author  of 
this  book  calls  many  merchants  friend,  and  is  himself 
both  banker  and  lawyer;  he  finds  it,  therefore,  undiplo- 
matic to  indicate  which  source  of  information  is  most 
likely  to  produce  the  correct  answer.  But  whether  it 
results  from  a  paucity,  or  too  great  a  number  of  coun- 
sellors, there  is  great  confusion  in  the  minds  of  merchants 
on  this  question.  There  is  current  an  impression  that 
one  of  the  virtues  of  a  confirmed  credit  is  that  the  drafts 
which  are  drawn  against  it  are  without  recourse.  There 
is  an  equally  well-fixed  belief  that  one  of  the  weak- 
nesses of  an  unconfirmed  credit  is  that  drafts  are  drawn 
with  recourse.  The  term  "recourse"  is  used  by  those 
who  hold  these  views  to  designate  a  situation  in  which 
the  beneficiary  remains  liable  to  refund  the  amount 
advanced  him,  with  interest,  until  the  ultimate  liquidation 
by  the  buyer  of  his  obligation  to  the  issuing  bank. 

The  only  real  importance  about  the  subject  of  recourse 
arises  from  the  fact  that  neither  of  these  prevalent  impres- 
sions is  true.  Recourse  may  exist  against  the  drawer  of 
a  draft  in  connection  with  a  confirmed  credit,  and  quite 

190 


RECOURSE  AGAINST  THE  BENEFICIARY  191 

as  frequently  recourse  does  not  exist  in  connection  with 
an  unconfirmed  credit.  And  where  recourse  exists  it  is 
usually  of  a  quite  different  character  from  that  just 
described  and  is  not  often  of  practical  moment. 

How  Recourse  Is  Determined 

We  shall  be  baffled  at  the  outset,  in  running  down 
this  question  of  recourse,  to  find  that  most  letters  of 
credit  are  discreetly  silent  on  the  subject  and  give  no 
clue  by  which  it  may  be  traced.  By  searching  a  while, 
we  may,  with  luck,  find  a  commercial  letter  of  credit 
which  specifically  states  that  drafts  may  be  drawn  with- 
out recourse.  That  information  is  comforting  to  the 
anxious  beneficiary,  but  will  not  quiet  the  earnest  seeker 
after  truth.  After  more  research,  he  may  chance  upon 
a  commercial  letter  of  credit  which  recites,  in  language 
similar  to  that  employed  in  an  authority  to  purchase, 
that  recourse  is  retained.  The  usual  phrase  reads  "this 
advice.  .  .  .  does  not  relieve  you  from  the  ordinary 
liability  attaching  to  the  drawer  of  a  bill  of  exchange." 
Now  we  have  the  scent !  What  ordinary  liability  attaches 
to  the  drawer  of  a  bill  of  exchange?  The  Uniform 
Negotiable  Instruments  Law  provides  that  the  drawer  of 
a  bill  of  exchange,  by  drawing  it  "engages  that  on  due 
presentment  the  instrument  will  be  accepted  and  paid,  or 
both,  according  to  its  tenor,  and  that  if  it  be  dishonored, 
and  the  necessary  proceedings  of  dishonor  be  duly  taken, 
he  will  pay  the  amount  thereof  to  the  holder,  or  to  any 
subsequent  endorser  who  may  be  compelled  to  pay  it." 
(Section  iii.  New  York  Negotiable  Instruments  Law.) 

In  brief,  the  drawer  of  a  draft  must  pay,  if  the 
drawee  does  not.  To  test  this  question  of  recourse,  then, 
as  applied  to  a  commercial  letter  of  credit,  we  must  isolate 
the  draft   from   its   surroundings,   and   contemplate  the 


192  AMERICAN  COMMERCIAL  CREDITS 

rights  and  liabilities  of  the  parties  to  it  as  to  any  other 
bill  of  exchange.  Having  this  in  mind,  let  us  examine, 
the  various  types  of  credits  which  are  offered  to  American 
exporters,  to  ascertain  on  whom  the  beneficiary  must 
draw,  and  at  what  terms. 

Dollar  Sight  Credits 

The  shortest  possible  route  between  the  drawing  of 
the  draft  and  its  presentment  to  the  drawee  is  the  quickest 
way  out  of  liability  to  recourse.  To  the  beneficiary  of 
a  credit  which  stipulates  that  drafts  are  to  be  drawn  in 
his  local  currency,  on  a  paying  bank  around  the  corner, 
recourse  is  a  feeble  thing,  which  "dies  a'borning."  His 
draft  is  drawn  at  his  office,  or  perhaps  at  the  counter  of 
the  bank,  and  in  return  for  the  surrender  of  the  draft 
to  the  bank  on  which  it  is  drawn,  he  receives  its  check 
for  the  face  amount  of  the  draft.  The  draft  is  thereby 
paid  and  extinguished,  and  the  beneficiary's  liability  as 
drawer  is  terminated.  In  fact,  the  tender  of  a  draft  in 
connection  with  this  type  of  credit  is  a  pure  formality 
which  the  paying  bank  will  waive.  It  serves  only  as  a 
receipt  and  as  an  indication  of  the  payee  designated  to 
receive  the  money  due  to  the  beneficiary.  A  letter  will 
suit  both  these  purposes  equally  well. 

Unconfirmed  Sight  Credits 

Now  that  we  know  how  recourse  is  created  and 
extinguished,  let  us  apply  our  newly  acquired  knowledge 
to  the  idea  that  recourse  is  inseparably  associated  with 
unconfirmed  credits.  An  unconfirmed  credit,  we  have 
learned,  is  one  of  which  the  beneficiary  has  been  advised 
through  the  medium  of  a  notifying  bank,  which  acts 
simply  as  a  medium  for  the  transmittal  of  information 
from  the  opening  bank.     Such  a  credit  may  be  either 


RECOURSE  AGAINST  THE  BENEFICIARY  i93 

revocable  or  irrevocable  on  the  part  of  the  opening  bank. 
It  may  stipulate  that  the  drafts  are  to  be  drawn  in  local 
currency  on  the  notifying  bank,  which  in  that  case  is 
also  to  assume  the  role  of  paying  bank;  it  may  require 
drafts  in  foreign  currency  on  the  opening  bank  or  on  the 
accredited  buyer  and  contemplate  that  some  local  bank 
will  volunteer  for  the  role  of  negotiating  bank. 

However,  the  type  of  unconfirmed  credit  which  has 
been  in  most  familiar  use  in  the  United  States,  and  on 
which  over  half  of  our  export  commercial  credit  business 
has  been  done,  is  the  revocable  type  which  is  availed  of 
by  drawing  a  draft  in  dollars  at  sight  on  an  American 
bank.    In  May,  1921,  merchants  interested  in  the  develop- 
ment of  our  foreign  trade  met  at  the  Chamber  of  Com- 
merce of  the  State  of  New  York  and  declared  this  type 
of  credit  "useless  for  the  security  desired  and  not  con- 
sidered of  any  value  for  import  or  export  transactions." 
The  American  bank  does  not  undertake  in  advance  that 
drafts  will  be  paid,  it  is  true;  the  credit  does  not  there- 
fore offer  protection  against  cancellation  prior  to  its  util- 
ization, and  to  that  extent  does  not  give  "the  security 
desired."     But  if  on  presentation  the  draft  is  paid,  the 
beneficiary  is  out  of  the  transaction  from  that  point.    He 
is  not  concerned  whether  the  bank  which  paid  him  the 
money  is  reimbursed  by  the  opening  bank,  or  whether  the 
opening  bank  is  in  turn  reimbursed   by  the  accredited 
buyer.     Such    a    credit,    therefore,    fulfils    the    primary 
function  of  the  commercial  credit  device  in  financing  the 
shipment,  and  also  serves  the  secondary  purpose  of  safe- 
guarding  the  credit   risk  during   the  period   of   transit. 
Though  it   fails  to  protect  the   beneficiary  against   loss 
caused  by  its  cancellation  prior  to  the  time  shipment  has 
been  effected,  the  documents  have  been  presented,  and  the 
draft  has  been  paid,  it  is  far  from  "useless  as  security." 
13 


194  AMERICAN  COMMERCIAL  CREDITS 

Confirmed  Sight  Credits 

The  type  most  popular  to  the  American  exporter  has 
been  the  irrevocable  credit,  confirmed  by  an  American 
bank  and  availed  of  by  drafts  drawn  on  it  at  sight  in 
dollars.  By  confirming  the  credit  the  American  bank 
undertakes  that  the  drafts  will  be  honored.  It  thus  affords 
protection  against  cancellation  of  the  credit  prior  to  util- 
ization. In  every  other  respect  it  is  like  the  revocable 
credit.  So  far  as  recourse  is  concerned,  it  does  not  exist 
against  the  drawer  in  either  the  confirmed  or  unconfirmed 
type  of  sight  dollar  credits  just  described,  because  the 
drafts  are  drawn  at  sight  on  the  paying  bank.  What 
about  time  drafts  on  the  paying  bank? 

Dollar  Acceptance  Credits 

Undoubtedly  the  most  useful  form  of  commercial 
credit  for  American  trade  at  the  present  time,  of  which 
we  shall  say  more  in  the  proper  place,  is  the  dollar 
acceptance  credit.  The  difference  between  it  and  the 
forms  of  sight  credits  just  set  forth  is  that  the  drafts 
are  drawn  at  time  and  not  at  sight.  On  first  presenta- 
tion to  the  notifying  or  confirming  American  bank  they 
are  not  paid,  but  accepted.  The  acceptance  is  evidenced 
by  a  notation  to  that  effect  written  on  the  face  of  the 
draft,  with  the  date  of  acceptance,  subscribed  in  the  name 
of  the  bank  (Figure  27). 

The  accepted  draft  is  at  the  disposal  of  the  drawer. 
If  he  is  not  in  need  of  money  he  can  hold  it  until  maturity 
and  present  it  for  payment.  If  he  needs  funds  he  can 
readily  dispose  of  it  at  the  preferential  rate  which  bank 
paper  commands,  either  to  a  bank  or  to  one  of  the 
discount  houses  which  have  built  up  a  ready  market  in 
this  country  for  that  class  of  paper. 

But  what  about  recourse?     It  is  the  name  of   the 


RECOURSE  AGAINST  THE  BENEFICIARY  IQS 

acceptor,  not  of  the  drawer,  which  gives  a  bank  accept- 
ance a  ready  market.  In  advertising  for  sale  the  bills  in 
their  portfolios,  discount  houses  list  only  the  names  of 


,  10,000.- •                      ^              .g                              New  York.       Jan.  18.       19  ts 
Ninety  {90). — ^  <     ppyj|.ft^r ^^dht -T.--. pay  to  the  order  of 


H  qa--;^- ^- -^ -  — '^ . -  ourselves- 


Ten  thousand  <^.%    —  '^  P,.-.\ 

a->^— «-?  rt — r 


' Dollars 


Value  received^;)  cSi^r^  toiaccount  of  letter  of  credit  N.  C.  B.  No.     5000 


To  the  National  City  ^ank  of  iNew  York                                                      ^ 
XT      V    1  /-.-i       J                                       American  Export  Co. 
New  York  City     2?  - 


Figure  27.     Bank  Acceptance 

the  acceptors.  The  buyer  rarely  seeks  to  know  the  name 
of  the  drawer  before  making  his  purchase  of  a  bank 
acceptance.  Nevertheless,  we  need  only  to  reread  the 
provisions  of  the  Negotiable  Instruments  Law  already 
quoted,  to  appreciate  that  the  drawer  is  liable  to  a  bona 
fide  holder  if  the  drawee  fails  to  pay  the  draft  at 
maturity. 

Nature  of  Recourse 

Recourse  in  this  case,  however,  is  not  the  sort  the 
beneficiary  usually  has  in  mind.  There  is  nothing  in  it 
which  makes  the  beneficiary  liable  to  refund  the  amount 
advanced  him,  with  interest,  until  the  ultimate  liquidation 
by  the  accredited  buyer  of  his  obligation  to  the  issuing 
bank,  or  that  of  the  issuing  bank  to  the  accepting  bank. 
The  risk  the  beneficiary  runs  as  drawer  of  a  draft  drawn 
on  and  acccepted  by  a  bank  is  simply  that  of  the  solvency 
of  that  bank.  The  only  recourse  that  exists  is  terminated 
by  the  payment  the  accepting  bank  makes  of  the  draft 
at  maturity  when  presented  by  the  bona  fide  holder. 


196  AMERICAN  COMMERCIAL  CREDITS 

Oftentimes  the  drawer  would  not  suffer  because  of 
this  right  of  recourse,  even  though  the  accepting  bank 
had  failed.  In  the  form  which  is  employed,  for  instance, 
by  American  banks  for  sterling  acceptance  credits,  the 
American  bank  issues  an  instrument  by  which  it  under- 
takes that  the  beneficiary's  drafts  will  meet  with  due 
honor  on  presentation  to  its  London  correspondent.  Con- 
sequently, if  the  London  bank  failed  after  acceptance 
and  was  unable  duly  to  honor  its  acceptance  at  maturity, 
the  beneficiary,  though  he  would  have  to  reimburse  a  bona 
fide  holder,  could  recoup  himself  from  the  American 
issuing  bank.  The  new  uniform  credits  are  drawn  in  a 
form  which  gives  the  beneficiary  this  protection. 

It  is  an  interesting  speculation,  which  has  apparently 
never  come  up  either  for  decision  or  discussion,  as  to 
whether  the  accredited  buyer  in  this  instance  would  be 
under  the  duty  to  recoup  the  beneficiary  if  the  opening 
bank  were  also  insolvent.  It  might  be  argued  that  as  the 
seller  had  elected  to  rely  on  the  credit  of  the  now  insolvent 
bank  rather  than  on  that  of  the  buyer,  he  must  stand  by 
his  choice.  This  argument,  however,  overlooks  the  fact 
that  the  use  of  the  acceptance,  instead  of  a  sight  credit, 
is  primarily  for  the  benefit  of  the  buyer.  Moreover,  the 
history  of  the  development  of  commercial  credits  indicates 
that  they  have  tended,  as  in  the  matter  of  confirmation, 
for  instance,  toward  the  idea  of  superimposing  one  obliga- 
tion on  another.  It  would  seem  in  keeping  with  the  gen- 
eral tendency,  therefore,  to  expect  the  accredited  buyer 
to  be  held  liable  in  such  a  case. 

Drawing  for  Acceptance  Without  Recourse 

Section  iii  of  the  New  York  Negotiable  Instruments 
Law,  which  has  just  ])een  quoted,  contains  this  further 
provision:  "but  the  drawer  may  insert  in  the  instrument 


RECOURSE  AGAINST  THE  BENEFICIARY  I97 

an  express  stipulation  negativing  or  limiting  his  own  lia- 
bility to  the  holder."  If  the  liability  of  the  drawer  of  a 
bank  acceptance  is  unimportant,  the  question  naturally 
arises  as  to  whether  the  drawer  might  not  obviate  the 
necessity  of  carrying  the  remote  contingent  liability  on 
his  books  by  adding  to  his  signature  the  phrase,  "Drawn 
without  recourse."  The  accepting  bank  could  have  no 
objection  to  such  a  procedure,  as  in  no  event  could  it 
look  to  the  drawer  for  recourse  in  case  it  is  not  other- 
wise reimbursed. 

The  practical  difficulty  is,  however,  that  a  draft  drawn 
in  that  fashion  is  thereby  rendered  ineligible  for  redis- 
count by  a  federal  reserve  bank,  which  impairs  its  sala- 
bility.  The  Federal  Reserve  Board  has  ruled  that  drafts 
so  drawn  are  not  eligible  for  discount  by  federal  reserve 
banks  or  for  purchase  by  them  in  the  open  market.  The 
reason  for  this  ruling  is  thus  explained  by  E.  R.  Kenzel, 
Deputy  Governor  of  the  Federal  Reserve  Board  of  New 
York : 

Under  section  four  of  the  law,  what  the  Federal  Reserve  Bank 
may  purchase,  is  regulated.  Very  great  distinction  was  made  be- 
tween bills  of  exchange  and  promissory  notes.  When  one  name 
on  a  bill  of  exchange  is  eliminated,  the  resulting  instrument  is 
nothing  more  than  a  promissory  note,  and  promissory  notes  are 
not  lawfully  purchased  by  the  Federal  Reserve  Banks. 

The  practical  motive  which  underlies  this  technical 
ruling  is  doubtless  the  feeling  that  a  merchant  who  is 
willing  to  assist  in  the  creation  of  a  credit  instrument, 
which  is  eligible  to  become  part  of  the  resources  of  our 
federal  reserve  banks  and  security  for  their  note  issues, 
should  sufficiently  satisfy  himself  of  the  responsibility  of 
the  accepting  bank  to  be  content  to  become  liable  if  the 
bank  fails.     However,  as  this  liability,  though  existent, 


198  AMERICAN  COMMERCIAL  CREDITS 

is  unimportant,  we  must  look  further  if  we  are  to  find 
a  practical  reason  for  concern  about  the  question  of 
recourse. 

Foreign  Currency  Credits 

In  issuing  the  negotiation  type  of  credit,  it  will  be 
remembered,  the  issuing  bank  does  not  specifically  instruct 
a  correspondent  to  pay  the  beneficiary.  It  relies  rather 
on  the  belief  that  bankers  in  the  domicile  of  the  bene- 
ficiary will  be  induced  to  negotiate  drafts  drawn  by  the 
beneficiary  on  the  issuing  bank,  on  the  strength  of  the 
undertaking  that  they  will  be  honored  when  presented 
overseas.  Here  again,  as  in  the  case  of  the  purchase  of 
a  bank  acceptance,  the  negotiating  bank  relies  upon  the 
name  of  the  bank  which  has  undertaken  to  accept.  But 
again  the  Negotiable  Instruments  Law  undoubtedly  pre- 
serves the  drawer's  liability,  unless  he  is  permitted  to 
evade  it  by  drawing  without  recourse.  The  practical 
objection  to  such  a  procedure  is  that  it  causes  the  bill 
to  be  regarded  with  suspicion  and  impairs  its  salability. 

Neither  is  this  recourse  of  the  sort  which  makes  the 
beneficiary  liable  in  case  the  buyer  fails  to  liquidate  the 
transaction.  The  beneficiary's  liability  as  drawer  in  this 
case  is,  like  his  liability  on  an  accepted  draft,  contingent 
upon  the  solvency  of  the  bank,  which  in  this  case,  instead 
of  already  having  accepted  the  draft,  has  agreed  in  ad- 
vance in  writing,  to  duly  honor  it  on  presentation.  The 
beneficiary  of  such  a  credit  should  satisfy  himself  at  the 
time  he  receives  it  that  it  contains  the  engagement  of  a 
responsible  bank  that  his  drafts,  drawn  in  accordance  with 
its  terms,  will  be  honored.  If  he  is  not  satisfied  with  that 
engagement,  the  credit  is  "useless  for  the  security  desired." 
If  he  is  satisfied,  the  credit  gives  him  protection  though  his 
drafts  are  drawn  and  negotiated  with  recourse.    We  have 


RECOURSE  AGAINST  THE  BENEFICIARY  IQQ 

not  yet,  therefore,  reached  the  point  where  recourse  be- 
comes of  practical  importance. 

The  Real  Question 

The  rule  to  be  deduced  from  what  has  been  said 
above  on  the  subject  is  that  recourse  exists  against  the 
beneficiary  in  favor  of  any  bona  fide  holder,  in  connec- 
tion with  any  draft  he  draws  to  avail  himself  of  a  com- 
mercial credit.  Where  he  escapes,  it  is  because  the 
terms  of  the  credit  enable  him  to  draw  a  draft  which 
he  can  himself  present  to  the  drawee  for  payment  instead 
of  getting  his  funds  by  negotiating  it  to  a  bona  fide 
holder.  But  this  recourse  arises  only  in  the  event  that 
the  drawee  fails  to  honor  the  draft,  and  a  banker's  credit 
is  an  undertaking,  by  a  bank,  in  legal  form,  that  it  will 
be  honored! 

The  real  question  is :  Has  a  reliable  bank  undertaken 
at  some  time  and  at  some  place  to  honor  the  draft?  If 
that  undertaking  is  satisfactory,  recourse  is  of  academic 
interest.  It  becomes  of  importance  only  when  there  is 
no  satisfactory  undertaking  that  the  draft  will  be  paid. 
To  find  such  a  credit  we  must  go  beyond  the  scope  of 
bankers'  credits. 

Authority  to  Purchase 

We  have  already  observed  that  there  is  lacking  in 
the  authority  to  purchase  issued  by  Far  Eastern  bankers 
to  their  agencies  and  correspondents  in  this  country,  any 
engagement  that  the  drafts  which  the  beneficiary  draws 
on  the  buyer  will  be  honored.  Full  recourse  is  had  by 
the  bank  on  the  drawer  until  the  drafts  are  liquidated. 
With  that  understanding  the  Far  Eastern  bank  authorizes 
its  New  York  branch  or  correspondent  to  advance  the 
face  amount  of  the  bill. 


2CX)  AMERICAN  COMMERCIAL  CREDITS 

Such  a  device  is  of  less  value  than  a  revocable  dollar 
credit,  for  it  affords  no  protection  against  rejection  of 
the  goods  and  draft  on  arrival.  It  has  value  only  to 
merchants  who  are  satisfied  with  the  buyer's  integrity 
but  lack  sufficient  capital  or  credit  to  finance  on  their 
own  name  all  the  business  offered  them.  It  fulfils  one 
of  the  legitimate  functions  of  the  commercial  credit  device 
in  that  it  puts  the  burden  of  overseas  finance  on  the  buyer, 
but,  so  far  as  protection  to  the  beneficiary  is  concerned, 
it  has  no  real  value.  In  that  respect  it  must  be  regarded 
simply  as  the  equivalent  of  a  favorable  credit  report  on 
the  buyer. 

Accommodation  Draft  on  Buyer 

Now  let  us  subject  our  newly  accumulated  knowledge 
to  the  acid  test  by  applying  it  to  the  really  puzzling  form 
of  credit  issued  by  some  Far  Eastern  bankers.  The  Dai- 
Ichi  Ginko,  Ltd.,  credit  (Figure  14,  page  65)  is  repre- 
sentative of  the  types.  It  provides  for  the  payment  by 
its  New  York  correspondent,  in  dollars,  without  discount, 
of  the  amount  of  the  beneficiary's  draft,  but  compels 
him  nevertheless  to  draw  the  draft  at  90  days  after  sight 
on  the  accredited  buyer  in  the  Far  East.  Is  such  a  credit 
nothing  but  an  authority  to  purchase  in  disguise?  Might 
the  Dai-Ichi  Ginko,  Ltd.,  in  the  event  that  the  accredited 
buyer  failed  to  pay  the  draft  at  maturity,  return  it  to 
the  National  City  Bank  for  the  purpose  of  suit,  if 
necessary,  against  the  beneficiary,  based  upon  the  pre- 
vision of  the  Negotiable  Instruments  Law  previously 
quoted  ? 

It  is  the  opinion  of  several  competent  students  of  the 
subject  that  there  would  be  no  recourse  in  this  event 
against  the  drawer  by  a  holder  who  had  knowledge  of 
the  circumstances  under  which  the  drafts  were  drawn. 


RECOURSE  AGAINST  THE  BENEFICIARY  201 

To   quote   from  one  such  opinion,   given  by   Omer   F. 
Hershey  of  the  Baltimore  Bar: 

The  New  York  bank  represents  that  it  has  received  monies  to 
the  use  of  the  beneficiary  to  be  paid  to  him  upon  performing  the 
conditions  of  the  letter.  One  of  these  conditions  is  that  in  order 
that  the  Far  Eastern  bank,  which  has  put  the  New  York  bank  in 
funds  for  the  purpose  of  the  letter  of  credit,  may  be  reimbursed, 
a  draft  shall  be  drawn  to  its  order  upon  the  buyer-holder.  It 
seems  evident,  from  the  whole  transaction,  that  a  drawer  of  the 
draft  does  this  simply  as  a  means  of  enabling  the  Far  Eastern 
bank  to  get  its  money  and  that  the  draft  is  not  an  ordinary  inde- 
pendent business  transaction  to  be  judged  as  such.  Any  one  who 
had  notice  of  the  whole  transaction  of  which  this  forms  a  part, 
would,  it  seems  to  me,  have  notice  that  the  Far  Eastern  bank  had 
advanced  money  to  the  New  York  bank  for  the  credit  of  the 
buyer-holder,  which  money  the  New  York  bank  by  contract  with 
the  Far  Eastern  bank  held  to  the  use  of  the  seller-addressee,  and 
consequently  there  could  be  no  claim  on  the  part  of  the  Far 
Eastern  bank  unless  by  virtue  of  the  literal  tenor  of  the  bill  of 
exchange.  But  that  bill,  without  any  violation  of  the  parole 
evidence  rule,  could  be  shown  to  be  a  part  of  the  general 
transaction. 

As  there  is  no  discount  market  in  the  Far  East  in 
w^hich  the  issuing  bank  can  discount  these  drafts  after 
acceptance,  it  is  probable  that  they  are  utilized  simply  to 
give  the  issuing  bank  an  accepted  draft  as  evidence  of 
the  accredited  buyer's  obligation  to  it.  They  apparently 
serve  no  purpose  which  cannot  be  achieved,  as  is  done  in 
other  countries,  by  the  use  of  an  adequate  agreement  to 
reimburse  given  by  the  accredited  buyer  to  the  opening 
bank.  Hov^rever,  there  would  appear  to  be  no  objection 
to  the  continuance  of  their  use  if  the  beneficiary  was 
permitted  to  draw  such  drafts  without  recourse,  and  thus 
to  give  notice  to  holders  of  the  true  character  of  the 
drafts. 


202  AMERICAN  COMMERCIAL  CREDITS 

Recourse  and  the  Uniform  Commercial  Credit  Instru- 
ments 

In  drafting  the  uniform  commercial  credit  instruments, 
the  Commercial  Credit  Conference  regarded  it  as  unneces- 
sary to  consider  the  question  of  recourse,  as  related  to 
the  irrevocable  credit  (Figures  21  and  22)  and  the  con- 
firmed irrevocable  credit  (Figure  23).  These  forms 
derive  their  effectiveness,  so  far  as  the  beneficiary 
is  concerned,  from  the  fact  that  they  contain  a  bank 
undertaking  that  his  drafts  will  be  honored.  If  the  bene- 
ficiary regards  this  undertaking  as  satisfactorily  securing 
the  credit  risk,  he  will  not  be  concerned  over  the  fact 
that  holders  of  the  drafts  may  claim  that  the  right  of 
recourse  exists  against  him.  If  the  beneficiary  is  un- 
certain of  the  protection  afforded  by  the  undertaking, 
then  the  credit  itself  is  not  suitable  for  his  purposes  and 
he  should  seek  the  protection  he  desires  by  asking  for  a 
credit  opened  or  confirmed  by  a  bank  in  which  he  has 
confidence,  rather  than  to  attempt  to  pass  an  unsatisfactory 
risk  on  to  the  negotiator  of  his  draft  by  drawing  without 
recourse. 

The  authority  to  pay,  however,  presents  a  different 
problem,  as  the  inter-bank  agreement,  by  which  the  open- 
ing bank  undertakes  to  reimburse  the  advising  bank  for 
payments  or  advances  made,  conveys  no  rights  of  which 
the  shipper  may  avail  himself,  and  the  advice  of  authority 
to  pay  contains  no  undertaking  that  the  shipper's  drafts 
will  be  honored.  If  the  terms  of  the  advice  were  to  require 
the  shipper  to  draw  on  the  opening  bank  or  on  the  ac- 
credited buyer,  the  shipper  would  have  either  to  draw 
without  recourse  or  assume  the  liability  ordinarily  attach- 
ing to  the  drawer  of  a  bill  of  exchange,  unless  he  could 
successfully  evoke  the  plea  that  he  was  an  accommodation 
maker.    The  Commercial  Credit  Conference  reached  the 


RECOURSE  AGAINST  THE  BENEFICIARY  203 

conclusion  that  the  question  of  recourse,  in  connection  with 
the  authority  to  pay,  should  not  be  left  to  conjecture  or 
argument,  and  accordingly  provided  that  both  the  inter- 
bank agreement  and  the  advice  should  specifically  restrict 
its  use  to  drafts  drawn  on  the  notifying  bank.  When  re- 
course is  to  be  retained  the  Far  Eastern  authority  to  pur- 
chase should  be  employed,  as  it  is  entirely  suitable  for  that 
purpose;  where  recourse  is  waived  the  authority  to  pay 
serves  the  purpose  which  was  previously  met  by  the  un- 
confirmed credit. 

Bank  Guaranties 

Foreign  banks,  at  times,  instead  of  issuing  a  credit 
instrument,  communicate  to  the  shipper,  either  directly 
or  through  the  medium  of  a  correspondent,  the  statement 
that  they  guarantee  that  drafts  drawn  in  accordance  with 
certain  stipulations  will  be  honored.  If  the  drafts  are 
to  be  drawn  on  the  bank  giving  the  guaranty,  such  an 
agreement  is  in  its  general  aspect  similar  to  a  negotiation 
credit.  Even  then,  however,  there  might  be  difficulty  in 
construing  it  as  an  undertaking  to  accept,  within  the 
meaning  of  the  Negotiable  Instruments  Law,  and,  even 
though  so  construed,  it  would  protect  only  holders  for 
value.  It  thus  would  not  have  the  effect  of  a  negotiation 
credit,  as  the  drawer's,  and  probably  a  holder's  rights, 
would  have  to  be  determined  by  the  law  of  guaranty 
and  not  by  the  Negotiable  Instruments  Law.  If  the 
drafts  are  to  be  drawn  on  the  buyer,  this  would  undoubt- 
edly be  the  case.  It  is  a  basic  principle  of  the  law  of 
guaranty  that  a  guaranty  is  to  be  strictly  construed  in 
favor  of  the  guarantor.  There  is  also  always  present  the 
question  of  the  authority  of  the  bank  to  issue  a  guaranty. 
National  banks  in  the  United  States,  for  instance,  do  not 
have  authority  to  guarantee  the  debts  or  obligations  of  third 


204  AMERICAN  COMMERCIAL  CREDITS 

parties.  Although  recourse  against  the  drawer  of  such  a 
draft  is  in  theory  not  unlike  that  of  one  drawn  under  a 
negotiation  credit,  the  question  is  always  important  in 
such  an  arrangement,  because  of  the  practical  difficulties 
in  the  way  of  enforcing  the  engagement  that  the  drafts 
will  be  honored. 

A  Practical  Instance 

In  July,  1920,  a  Christiania  bank  issued  the  following 
letter  of  guaranty: 

By  order  and  for  acount  of  A/S  Norwegian  Import  Company, 
Christiania,  we  hereby  guaranty  American  Export  Company,  New 
York,  the  right  payment  of  up  to  $6,500  against  surrender  to  us  of 
shipping  documents  covering  fifty  tons  steel  plate  to  be  delivered 
the  fourth  quarter  of  1920.  This  guaranty  remains  in  force  until 
December  31,  1920. 

Shipment  was  effected  and  documents  forwarded  for 
presentation  to  the  Christiania  bank  which,  upon  receiving 
them,  replied  by  cable  as  follows: 

Norwegian  importer  informs  documents  incomplete  as  Lloyds 
certificate  missing.  Claim  certificate  or  guaranty  that  goods  are 
certified.  Further  that  some  specifications  do  not  agree  and  about 
four  tons  more  shipped  than  guaranteed. 

The  American  exporting  concern  replied  by  the  fol- 
lowing cable: 

Your  guaranty  calls  for  full  set  of  shipping  documents  only; 
does  not  specify  Lloyds  inspection  certificate.  We  request  you  to 
make  payment  at  once  under  your  guaranty. 

The  reply  of  the  Christiania  bank  was  as  follows: 

When  guaranteeing  it  is  understood  that  documents  are  to  be 
delivered  as  per  contract.  Norwegian  importer  refuses  payment 
as  such  documents  not  delivered. 


RECOURSE  AGAINST  THE  BENEFICIARY  205 

This  was  subsequently  supplemented  by  a  further 
cable  reading: 

Guarantee  is  not  identical  with  confirmed  credit.  Under 
guaranty  if  payment  refused  not  entitled  pay  before  eventual 
final  judgment  against  debtor.  Therefore  in  addition  earher  stated 
reason  regret  cannot  pay  at  present. 

If  the  doctrine  is  established  that  a  guaranty  of  such 
a  character  is  not  similar  to  a  credit  but  simply  an  agree- 
ment to  be  secondarily  liable  and  that  all  defenses  which 
would  be  open  to  the  primary  obligor  are  open  to  the 
bank  issuing  it,  it  would  destroy  the  usefulness  of  such 
a  guaranty  as  an  inducement  to  bankers  to  negotiate 
drafts.  Such  a  guaranty  cannot  safely  be  considered  as 
anything  more  than  a  form  of  credit  insurance,  and  the 
drawer  must  expect  that  the  bank  which  has  negotiated 
his  draft  will,  in  case  the  drafts  are  dishonored,  imme- 
diately demand  the  repayment  of  its  advances,  with  inter- 
est, and  remit  the  drawer  to  the  pursuit  of  any  legal 
rights  which  the  guaranty  may  afford  him., 

Recourse  No  Cause  for  Anxiety 

A  commercial  credit  that  protects  is  one  that  contains 
the  irrevocable  engagement  of  a  responsible  bank  that 
drafts  drawn  in  accordance  with  its  terms  will  be  hon- 
ored. With  that  any  credit  is  useful  for  the  security 
desired,  even  though  it  be  not  confirmed  to  the  bene- 
ficiary by  a  local  bank  and  even  though  the  right  of 
recourse  is  held  by  the  negotiating  bank.  Without  that 
engagement  the  instrument  is  not  entitled  to  be  considered 
as  coming  within  the  scope  of  bankers'  credits.  If  the 
credit  is  right,  recourse  is  of  no  concern. 


s 


CHAPTER  XIV 

PROTECTION   OF  THE  MERCANTILE  RISK 

The  Mercantile  Risk 

We  have  said  that  a  seller  may  legitimately  seek  a 
commercial  letter  of  credit  to  protect  himself  against  a 
buyer  of  doubtful  credit  responsibility.  May  a  buyer 
legitimately  supply  the  letter  of  credit  for  the  purpose 
of  protecting  himself  from  an  irresponsible  seller?  Of 
course,  the  seller  is  not  paid  until  his  shipping  documents 
are  surrendered  to  the  bank  which  acts  as  negotiating  or 
paying  agent  for  the  buyer's  bank,  and  to  that  extent 
a  commercial  letter  of  credit  protects  the  buyer. 

These  documents  may,  however,  be  fraudulent.  The 
United  States  District  Court  for  the  Southern  District 
of  New  York  has  recently  had  before  it  a  criminal  prose- 
cution, based  upon  allegations  that  the  beneficiaries  of 
certain  commercial  letters  of  credit  had  shipped  a  bag 
or  two  of  the  commodities  stipulated  and  altered  the 
bills  of  lading  obtained  from  the  steamship  company 
falsely  to  evidence  the  shipment  of  the  quantity  of  goods 
required  by  the  credits.  They  presented  the  bills  of  lading 
and  obtained  payment. 

The  documents  may  be  genuine,  but  the  commodity 
may  not  be  that  which  should  have  been  shipped.  An 
honest  but  inexperienced  beneficiary,  for  example,  pur- 
chases from  a  local  dealer  and  ships  a  number  of  barrels 
which  are  supposed  to  contain  a  chemical  in  crystalline 
form,  but  which  turn  out  to  contain  water.  The  supplier 
has  meanwhile  disappeared,  while  the  beneficiary  has  spent 

206 


PROTECTION  OF  THE  MERCANTILE  RISK        207 

the  profit  he  has  made  and  is  penniless.  The  buyer  in 
that  case  has  little  chance  of  getting  satisfaction. 

Moreover,  the  commodity  as  well  as  the  documents 
may  be  that  stipulated  by  the  commercial  letter  of  credit, 
but  the  terms  of  the  contract  of  sale  may  have  been 
modified,  subsequent  to  the  issuance  of  the  credit,  so 
as  to  require  the  seller  to  deliver  a  commodity  of  greater 
value. 

Thi^  risk  of  departure  by  the  seller,  either  inad- 
vertently or  by  intention,  from  the  strict  letter  of  his 
obligation  to  the  buyer,  as  evidenced  by  the  contract  of 
sale,  is  termed  the  "mercantile  risk." 

The  Buyer's  Dilemma 

If  the  buyer  establishes  a  commercial  letter  of  credit 
in  favor  of  the  seller,  which  enables  the  seller  to  receive 
his  money  some  time  before  the  buyer  can  inspect  the 
goods,  or  even  the  documents,  how  is  the  buyer  to  pro- 
tect this  mercantile  risk?  To  what  degree  can  the  paying 
or  negotiating  bank  be  placed  under  responsibility  to 
examine  the  documents  which  accompany  the  beneficiary's 
draft?  Is  it  feasible  to  put  on  the  negotiating  or  paying 
bank  the  duty  of  checking  the  seller's  performance  of 
the  terms  of  the  contract  of  sale?  And  if  it  is  not,  is 
a  commercial  letter  of  credit  a  one-sided  device  which 
protects  the  seller  but  leaves  the  buyer  without  pro- 
tection ? 

Contract  of  Sale 

Let  us  first  consider  how  the  attempt  to  use  a  com- 
mercial credit  to  protect  the  mercantile  risk  fits  in  with 
the  legal  aspect  of  the  relationship  of  the  parties  to  the 
credit.  It  has  always  been  understood  and  has  recently 
been  reaffirmed  in  decisions  reviewed  in  Chapters  XVII 


2o8  AMERICAN  COMMERCIAL  CREDITS 

and  XVIII,  that  the  obligation  of  the  bank  which  has 
issued  a  commercial  credit  to  the  seller  of  the  goods  as 
the  beneficiary,  is  quite  independent  of  the  obligation 
between  the  buyer  and  the  seller  as  such,  evidenced  by 
the  contract  of  sale.  A  beneficiary  does  not  become 
entitled  to  avail  himself  of  a  commercial  letter  of  credit 
by  performing  the  terms  of  his  contract  of  sale,  if  the 
documents  do  not  conform  to  the  terms  of  the  credit.^ 
Nor  is  it  a  ground  for  an  injunction  against  payment  by 
the  bank  to  the  beneficiary  that  the  terms  of  the  contract 
of  sale  have  not  been  complied  with,  if  the  documents 
conform  to  the  terms  of  the  credit.^ 

Insertion  of  Contract  in  Credit 

The  thought  at  once  occurs  that  the  accredited  buyer 
may  avoid  the  effect  of  these  decisions  by  instructing 
the  opening  bank  to  incorporate  in  the  terms  of  the  credit 
either  the  contract  of  sale  verbatim,  or  excerpts  from  it 
containing  a  minute  description  of  the  merchandise,  the 
stipulations  concerning  the  shipping  date,  and  the  like. 

Let  us  see  how  this  works  out  practically.  A  par- 
ticularly striking  example  of  the  insertion  of  a  detailed 
description  of  the  merchandise  is  afforded  by  the  follow- 
ing cabled  credit,  sent  to  its  American  correspondent  by 
an  Italian  bank  at  the  behest  of  an  Italian  buyer  of 
goods : 

Open  credit  No favour  American  Rubber  Export 

Company  account  Italian  Rubber  Import  Company  up  to  $12,000 
including  freight,  insurance  covering  3,000  kilos  brown  rubber  as 
follows.  No.  30 — 450  warps  of  23  threads  each;  No.  34 — 300 
warps  of  10  threads  each,  450  of  14,  900  of  20;  No.  40 — 750  warps 
of  14  threads,  1200  of  20,  300  of  23,  450  of  30,  300  of  33;  No.  44— 


*  International   Banking  Corporation  v.   Irving  National  Bank,  page  259. 
'  Frey  and  Company,  v.  National  City  Bank,  page  254. 


PROTECTION  OF  THE  MERCANTILE  RISK        209 

450  warps  of  18  threads;  No.  52—300  warps  of  23  threads  each, 
600  of  28;  total  6,450  warps — shipment  as  soon  as  possible  in  two 
or  three  steamers. 

It  is  worth  while  to  speculate  for  a  moment  on  such 
a  request.  What  might  the  Italian  bank  and  its  customer 
expect  to  accomplish  by  the  incorporation  of  this  detail? 
Assuredly,  the  order,  with  its  minute  description  of  the 
goods,  was  already  in  the  hands  of  the  American  Rubber 
Export  Company.  The  receipt  from  the  American  bank 
of  the  advice  of  the  opening  of  the  credit  would  take  on 
no  added  usefulness  by  being  festooned  with  this  redun- 
dant detail.  The  information  must  have,  therefore,  been 
imparted  to  the  American  bank  with  the  idea  that  the 
bank  would  employ  it  in  checking  up  the  merchandise  at 
the  time  the  shipping  documents  were  presented. 

As  it  happened,  the  beneficiary  of  this  credit,  which 
is  set  forth  here  with  no  alteration  except  in  the  names 
of  the  parties,  was  one  of  the  premier  industrial  organiza- 
tions of  the  United  States.  If  it  had  failed  to  fulfil  its 
contract,  the  buyer  would  have  had  an  adequate  remedy 
against  it  by  action  at  law  for  breach  of  contract.  Had 
it,  however,  been  a  morally  and  financially  irresponsible 
organization  it  would  undoubtedly  have  taken  punctilious 
care  to  invoice  its  goods  to  conform  exactly  to  the  terms 
of  the  credit,  whatever  their  actual  character  may  have 
been.  Certainly,  then,  the  Italian  buyer  could  expect  no 
protection  against  an  irresponsible  seller,  unless  he  con- 
templated that  the  American  bank  would  actually  examine 
the  merchandise.  Undoubtedly  he  must  have  cherished 
a  mental  picture  of  the  commercial  credit  department  of 
the  American  bank  taking  a  holiday  on  the  water-front 
— probably  as  the  guests  of  the  delightfully  surprised 
steamship  company — and  plunging  joyously  into  the  pack- 
ing cases  containing  the  3,000  kilos  of  brown  rubber, 
14 


2IO  AMERICAN  COMMERCIAL  CREDITS 

sedulously  separating  the  6,450  warps  into  neat  heaps, 
graded  according  to  the  number  of  threads,  and  then 
repacking  them — all  for  }i  per  cent  commission,  which 
is  to  say,  $15. 

Banks  Not  Equipped  to  Inspect  Merchandise 

The  proper  function  of  a  bank  is  to  finance  business, 
and  the  proper  function  of  a  letter  of  credit  is  to  serve 
as  an  instrument  of  finance.  The  personnel  of  a  bank 
are  trained  to  gauge  the  credit  risk;  they  are  not  mer- 
chants, and  their  knowledge  of  the  technique  of  the 
various  lines  is  necessarily  fragmentary.  As  Judge  Mayer 
said  in  the  case  of  International  Banking  Corporation  v. 
Irving  National  Bank,  "The  simplest  words  of  art 
in  commercial  transactions  often  have  a  trade  meaning; 
a  yard  may  mean  i}i  yards  in  one  business  and  a  yard 
exactly  in  another;  design  may  mean  one  thing  in  silk 
and  another  in  cotton."  So  long  as  a  bank  confines  itself 
to  banking,  therefore,  it  is  not  equipped  to  play  the  role 
of  inspector  and  appraiser.  It  endeavors  to  avoid  the 
task  whenever  it  can.  When  it  must  assume  it,  it  does 
it  with  little  credit  to  itself  and  small  satisfaction  to  the 
buyer. 

The  following  instructions  which  have  been  prepared 
and  sent  by  a  San  Salvador  coffee  merchant  to  his 
customers  illustrate  how  poorly  the  attempt  to  impose  on 
the  banks  responsibility  for  checking  the  mercantile  risk 
works  out  in  practice : 

Opening  of  Credits  for  Reimbursements 

All  reimbursements  must  be  provided  for  in  the  way  of  a 
confirmed  irrevocable  credit  opened  with  first  class  bankers,  ad- 
vised to  us  by  the  bankers  themselves,  as  soon  as  the  contract  of 
sale  has  been  closed  between  our  Agents  and  the  buyers,  or  directly 
between  ourselves  and  the  buyers. 


PROTECTION  OF  THE  MERCANTILE  RISK        211 

It  is  not  necessary  that  the  bankers  should  send  us  long  tele- 
grams relating  all  particulars  of  the  transaction  connected  with 
the  credit  they  are  opening  in  our  favor.  A  short  telegram  will 
do,  if  only  it  contains  the  following  indications : 

Reference  number  of  the  credit  opened  in  our  favour ; 
The  name  of  buyers  for  whose  account  the  credit  is  being 
opened ; 

The  amount  of  exchange  placed  at  our  disposal ; 
The  number  of  bags  of  coffee  sold  to  buyers; 
The  bankers'  signature. 

They  can,  if  they  wish,  add  the  port  of  destination  and  the 
time  of  shipment.  This,  however,  does  not  seem  to  us  of  much 
use,  as  the  conditions  agreed  upon  are  being  fixed  through  the 
telegrams  exchanged  between  ourselves  and  our  Agents  or  our 
direct  buyers. 

For  instance :  If  we  have  sold  to  Messrs  "Name  and  Co."  300 
bags  of  Extra  Prime  washed  Coffee,  Assortment  of  50%  of  Firsts 
and  50%  of  Seconds  at  $15  per  50  kilos,  cost  and  freight  Havre, 
shipment  per  steamer  during  June,  July,  reimbursement  by  our 
sight  draft  upon  the  National  City  Bank  of  New  York,  shipping 
documents  accompanying  our  drafts.  It  would  be  sufficient  that 
the  National  City  Bank  of  New  York  wires  us  as  follows: 

"Reference  974      Name  6210  dollars  300  bags      Citibank." 

974  would  be  the  reference  number  that  we  ought  to  write  upon 
our  draft,  and  the  tenor  of  that  telegram  would  be  quite  clear  to 
us,  meaning  that  our  Agents  had  done  the  necessary  to  have 
reimbursement  provided   for   under  the  conditions    required. 

We  specially  recommend  to  our  Agents  and  Buyers  to  be 
pleased  to  give  to  their  bankers  their  instructions  as  briefly  as 
possible,  omitting  any  particulars  that  have  no  practical  interest 
for  the  bankers,  but  are  liable  to  induce  to  error  some  bank  officers 
not  sufficiently  acquainted  with  the  coffee  business  to  be  able  to 
confront  accurately  our  invoice  with  their  instructions. 

A  Few  of  the  Many  Reasons  Why  New  York  Banks  Refused 

TO  Pay  Drafts  Issued  upon  Shipments  of  Coffee 

Effected  Last  Crop 

Shipment  of  500  bags  upon  whose  Bill  of  Lading  the  freight 
clerk  aboard  steamer  in  Acajutla  wrote  in  blue  pencil  "20  bags  wet 


212  AMERICAN  COMMERCIAL  CREDITS 

by  salt  water."  Drafts  refused  payment  by  New  York  bank 
because  of  that  note,  which  was  something  done  by  steamer  Co.'s 
employe  when  coflfee  was  aboard  steamer  and  out  of  our  jurisdic- 
tion. We  must  call  attention  to  the  fact  that  coffee  was  insured 
against  all  damage  or  loss  by  policy  of  the  buyers. 

Shipment  of  450  bags  of  Current  unwashed  coffee  250  of  which 
were  invoiced  as  such  and  200  being  "peaberry."  Draft  refused 
payment  because  our  invoice  did  not  say  that  the  other  250  bags 
were  "flats." 

It  is  never  necessary  to  tell  anybody  with  a  cursory  knowledge 
of  coffee  that  "peaberry"  is  only  the  accidental  variety  of  round 
berry;  and  that  it  is  always  invoiced  as  such,  and  that  it  never 
amounts  to  more  than  about  5%  of  total  crop;  95%  of  all  coffee 
is  "flat"  and  nobody  ever  describes  it  in  any  invoice  as  being  "flat." 

Sale  was  made  of  250  bags  Superior  Unwashed  Coffee  and  250 
bags  of  Fair  Average  current  unwashed  coffee  to  Goteborg.  Ship- 
ment was  effected  and  the  coffee  was  invoiced  as  being  250  bags 
of  Fair  Average  Current  Unwashed  Coffee  and  250  bags  of 
Superior  Unwashed. 

Draft  was  refused  payment  because  in  the  invoice  the  250  bags 
of  Fair  Average  were  invoiced  on  the  first  line  and  the  250  bags  of 
Superior  were  invoiced  on  the  second  line ! ! ! 

All  Bills  of  Lading  start  in  by  saying:  "Received  in  apparent 
good  order  and  condition  from  So  &  So,  so  many  bags  of  Coffee 
&c  &c  &c."  Some  of  the  New  York  banks  refused  payment  of 
drafts  alleging  that  these  Bills  of  Lading  did  not  actually  state 
that  the  Coffee  had  really  been  received  aboard  the  steamer. 

A  Hamburg  buyer's  banker  cabled  the  New  York  bank  opening 
a  credit  for  what  the  Hamburg  bank  described  as  "250  bags  of 
Ungew  Kaffe  and  our  Invoice  said  250  bags  of  Unwashed  Coffee." 

The  New  York  bank  refused  payment  because  our  description 
of  the  coffee  did  not  accord  with  that  of  the  Hamburg  banker. 

"Ungew,"  is  a  known  and  accepted  German  abbreviation  for 
"ungewaschen"  say  "unwashed"  ! ! ! 

A  Chilian  buyer  opened  a  credit  against  shipment  of  200  bags 
of  Washed  Salvador  Coffee  size  "A."  The  invoice  described  these 
200  bags  as  being  Washed  Salvador  First  countermarked  "A." 

It  is  a  general  rule  that  washed  First  are  countermarked  "A," 
second  "B"  and  Peaberry  "C"  and  anybody  with  a  slight  knowl- 
edge of  coffee  understands  this. 

The  New  York  bank  refused  to  pay  draft  and  we  never  were 


PROTECTION  OF  THE  MERCANTILE  RISK        213 

able  to  understand  why,  because  the  invoice  described  the  200  bags 
as  being  Firsts  and  being  marked  "A." 

Detailed  Description  of  Documents 

Sometimes  the  buyer  concentrates  his  passion  for 
detail  on  the  shipping  documents.  A  recent  Scandinavian 
credit  reflecting  an  effort  of  this  character  read: 

Please  open  credit  No,  000  for  account  of  Danish  Import 
Company  in  favor  of  American  Export  Company  for  about 
$3,900  plus  discount  and  stamp  ninety  days  against  draft  at  90- 
days  sight  and  delivery  of  clean  full  set  bills  of  lading  endorsed 
in  blank,  official  certificate  of  inspection  for  quality,  insurance 
certificate,  copy  of  provisional  invoice  for  about  500  quarters  of 
480  pounds  per  quarter  Number  2  Western  Rye  2  per  cent,  more  or 
less,  at  a  price  of  $35.75  per  1,000  kilos  c.i.f.  Hamburg  for  ship- 
ment per  SS  "Mary  Ann"  or  "Sarah  Ann"  from  North  American 
Atlantic  and/or  Canadian  port,  freight  deducted  if  not  prepaid, 
shipment  in  good  condition,  bills  of  lading  to  be  made  out  to  order 
and  must  read  "received  on  board"  or  words  to  that  effect,  not 
"received  for  shipment,"  dated  November/December  1921 ;  the 
insurance  must  cover  invoice  amount  plus  at  least  2  per  cent  profit, 
insurance  Lloyds  conditions  and  including  London  American 
Trade  Association  F,  P.  A.  clause  and  usual  Harter  Act  clauses. 

It  has  already  been  suggested  that  bank  clerks  are 
not  merchants ;  assuredly  they  are  not  insurance  .under- 
writers, nor  freight-brokers. 

If  stipulations  of  this  character  are  to  be  permitted 
to  appear  in  commercial  letters  of  credit,  no  banker  will 
feel  free  to  make  a  payment  or  negotiate  a  draft  until 
he  has  enlisted  the  co-operation  of  a  trade  advisor  and 
fortified  himself  with  an  opinion  from  counsel. 

Extent  of  the  Duty  to  Examine 

At  the  outset  of  this  chapter  we  inquired  whether  a 
commercial  letter  of  credit  was  a  one-sided  device  which 


214  AMERICAN  COMMERCIAL  CREDITS 

left  the  buyer  without  protection,  and  up  to  this  point 
the  evidence  would  appear  to  favor  an  affirmative  answer 
to  our  inquiry.  However,  this  evidence  is  intended,  not 
to  demonstrate  that  there  is  no  way  by  which  the  buyer 
may  seek  protection,  but  that  the  wrong  way  to  seek  it 
is  to  attempt  to  impose  strange  tasks  upon  the  banks.  Be- 
fore considering  the  means  which  are  at  the  disposal  of 
the  buyer,  it  is  proper,  nevertheless,  to  point  out  that, 
under  the  Regulations  of  1920,  which  are  a  fair  exposition 
of  the  general  understanding,  American  paying  banks 
undertake  that  "documents  will  be  examined  with  care 
sufficient  to  ascertain  whether  on  their  face  they  appear  to 
be  regular  in  general  form."  This,  it  will  be  recalled,  is 
a  greater  responsibility  than  they  are  called  upon  to  assume 
by  the  terms  of  the  customers'  agreement  to  reimburse 
(see  pages  142-152). 

Good  Faith  the  Test 

It  is  highly  desirable  that  this  increased  responsibility 
should  be  undertaken  by  banks,  because  it  gives  scope 
for  the  operation  of  the  greatest  of  all  protections — ^good 
faith.  On  the  paying  or  negotiating  bank  there  rests  a 
duty  to  examine  documents  with  ordinary  care,  and  for 
the  negligent  or  dishonest  performance  of  this  task,  which 
is  to  tfie  detriment  of  the  buyer,  they  should  be  respon- 
sible. However,  the  customary  commission  received  for 
the  performance  of  this  task  (as  Justice  Scrutton  has 
pointed  out,  in  the  opinion  quoted  at  page  97)  is  so 
small  as  scarcely  to  be  compensation  for  the  actual  labor 
and  expense  involved,  and  gives  nothing  for  any  risk 
assumed.  So  long,  therefore,  as  the  commissions  are 
to  be  fixed  at  this  low  level,  a  paying  or  negotiating  bank 
which  has  acted  in  good  faith  is  entitled  to  protection. 
The    paying   or    negotiating    bank   could    not,    however, 


PROTECTION  OF  THE  MERCANTILE  RISK        21$ 

demand  this  protection  from  the  opening  bank  if  the 
agreement  between  the  opening  bank  and  the  accredited 
buyer  permitted  the  buyer  to  take  advantage  of  any 
irregularity,  no  matter  how  trivial.  For  example,  a 
credit  might  stipulate  "shipment  New  York  to  Malmo" 
at  a  c.i.f .  price.  The  beneficiary  might  find  that  by  ship- 
ping from  Philadelphia  he  could  dispatch  the  goods  a 
fortnight  sooner,  examine  his  contract  and  find  that  it 
permitted  such  a  shipment,  ship,  and  be  paid.  This 
action  would  in  no  way  harm  the  buyer,  but  if  the  market 
for  the  goods  was  falling,  or  exchange  had  gone  against 
him,  he  might  seek  to  throw  the  shipment  back  on  the 
hands  of  the  negotiating  bank. 

A  bank  which  ill  advisedly  followed  its  customer's 
instructions  to  decline  payment  under  such  circumstances, 
would  not  only  find  itself  involved  in  litigation,  but, 
vastly  more  important,  would  find  bankers  everywhere 
unwilling  to  negotiate  bills  or  act  as  paying  agent  under 
its  commercial  letters  of  credit,  the  usefulness  of  which 
would  be  destroyed. 

The  present  agreement  between  the  accredited  buyer 
and  the  opening  bank,  on  the  one  hand,  and  the  custom- 
ary understanding  of  the  responsibility  for  the  examina- 
tion of  documents  in  good  faith  between  the  opening  bank 
and  the  paying  or  negotiating  bank,  on  the  other,  are 
nicely  calculated,  therefore,  to  afford  the  buyer  the  maxi- 
mum protection  he  is  entitled  to  expect  from  that  quar- 
ter, having  in  mind  the  compensation  paid  and  the  nature 
of  the  banking  business. 

A  Certificate  of  Compliance 

Even  though  one  may  agree  that  banks  cannot  with 
propriety  assume  the  responsibility  of  interpreting  the 
contract  of  sale,  it  is  hard  to  escape  the  conclusion  that 


2i6  AMERICAN  COMMERCIAL  CREDITS 

it  is  an  anomalous  situation  which  permits  a  seller  to 
be  confessedly  in  default  in  the  performance  of  the  terms 
of  his  contract  of  sale,  and  leaves  the  buyer  nevertheless 
helpless  to  prevent  him  from  collecting  the  purchase  price 
by  complying  with  the  terms  of  the  commercial  letter  of 
credit.  The  suggestion  has  been  made,  and  while  it  has 
not  met  with  favor,  it  is  repeated  here,  that  every  com- 
mercial letter  of  credit  should  include,  among  the  docu- 
ments to  be  surrendered  as  evidence  of  the  right  to 
receive  payment,  a  certificate  by  the  beneficiary  to  the 
effect  that  the  relative  shipment  complied  with  the  terms 
of  his  contract  of  sale.  A  wilfully  false  certificate  of 
this  character  would  undoubtedly  bring  the  oflfender  within 
the  criminal  statutes  of  some  states  and  countries,  and  it 
would  not  be  difficult  to  bring  influences  to  bear  to  supply 
additional  legislation  where  it  was  needed.  Such  a  cer- 
tificate might  not  stand  in  the  way  of  an  outright  scoun- 
drel, but  would  certainly  give  pause  to  the  overshrewd 
tradei'  who  is  ready  to  take  advantage,  so  long  as  it  is 
"within  the  law." 

The  Buyer's  Best  Protection 

The  buyer's  best  protection  is  to  select  his  seller  with 
care.  The  only  risk  involved  is  a  moral  risk.  The  buyer 
who  chooses  to  deal,  and  to  make  his  bank  and  its  corre- 
spondent deal,  with  a  morally  irresponsible  seller  should 
bear  the  consequences.  It  is  agreed  among  reputable 
merchants  that  a  fair  division  of  the  risks  in  commercial 
credit  operations  puts  the  credit  risk  on  the  bank  and 
the  mercantile  risk  on  the  buyer.  At  a  meeting  in  New 
York  City  held  in  June,  1921,  and  attended  by  represen- 
tatives of  leading  mercantile  and  banking  interests,  the 
consensus  of  opinion  reached  was  that  the  proper  function 
of  a  bank  in  issuing  a  commercial  credit  was  to  afford  a 


PROTECTION  OF  THE  MERCANTILE  RISK        217 

means  of  financing  the  transaction.  The  attempt  to  place 
responsibility  on  banks  to  check  the  proper  execution  of 
the  terms  of  the  contract  of  sale  between  buyer  and  seller 
by  incorporating  a  description  of  the  merchandise  or 
other  features  of  the  sales  contract  in  the  credit,  was 
felt  to  be  in  the  long  run  more  harmful  than  helpful  to 
foreign  trade. 

Mercantile  Certificate 

As  already  suggested,  this  does  not  mean  that  the 
bank  cannot  act  in  any  degree  to  protect  the  buyer.  It 
is  entirely  feasible  to  include  among  the  stipulated  docu- 
ments a  certificate  issued  by  an  accredited  agency.  Inspec- 
tion of  merchandise  for  export  is  not,  in  itself,  a  new 
practice.  Certificates  of  quality  are  now  issued  to  cover 
almost  every  conceivable  commodity.  The  most  notable 
examples  are  as  follows: 

Grain.  Grain  shipments  are  inspected  in  New  York  by  the 
New  York  Produce  Exchange  and  in  other  ports  by  similar  or- 
ganizations. The  inspection  is  made  in  conformity  with  standard- 
ized grades  that  have  been  established  by  the  United  States 
Department  of  Agriculture,  and  such  inspection  is  more  or  less 
under  the  supervision  of  this  department.  Certificates  of  quality 
are  issued  specifying  the  grade,  kind,  and  condition  of  the  grain. 
Weight  certificates  are  issued  by  the  elevator  which  delivers  the 
grain  to  the  steamer. 

Rice.  Rice  is  inspected  at  the  Gulf  ports  by  various  organiza- 
tions, notably  the  Rice  Millers  Association  and  the  local  boards 
of  commerce.  Samples  are  drawn  from  export  shipments  at  the 
dock  and  passed  upon  by  an  appointed  committee.  Certificates  are 
issued  which  show  the  grade,  kind,  and  condition  of  the  rice. 
The  rice  is  also  tested  for  moisture  content  and  the  percentage 
noted  upon  the  certificate.  A  standard  system  of  grades  is  main- 
tained, but  these  grades  are  relative  rather  than  constant,  depend- 
ing more  or  less  upon  the  crop  average  and  thus  varying  somewhat 
from  year  to  year. 


2i8  AMERICAN  COMMERCIAL  CREDITS 

Coal.  Coal  is  inspected  at  the  coal  ports  by  the  Tidewater 
Exchange.  This  exchange  controls  the  pooling  of  the  coal  accord- 
ing to  its  quality  or  grade  and  the  district  from  which  it  comes. 
When  delivery  is  made  to  steamer  the  Tidewater  Exchange  issues 
a  certificate  denoting  the  pool  from  which  delivery  is  made.  Certi- 
fication is  also  made  as  to  weight. 

Flour.  Flour  is  inspected  in  New  York  by  the  New  York 
Produce  Exchange  and  in  other  ports  by  similar  organizations. 
A  representative  sample  is  withdrawn  from  a  certain  percentage 
of  bags  in  a  given  lot  and  delivered  to  the  buyer  in  a  printed  sack 
bearing  identification  marks  and  result  of  inspection.  Certificates 
are  issued  covering  only  the  condition  of  "soundness  and  uni- 
formity" of  the  flour.  No  statement  is  ever  made  covering  quality 
or  grade. 

Meats  and  Provisions.  The  Bureau  of  Animal  Industry 
issues  a  certificate  covering  meats  and  provisions.  This  is  merely 
a  health  certificate  and  does  not  in  any  way  denote  the  actual 
quality,  grade,  or  merchantable  value  of  the  product.  Such  certifi- 
cates are  required  by  the  government  on  all  export  shipments,  the 
steamer  not  being  permitted  to  carry  such  products  until  certificates 
are  produced.  The  Board  of  Trade  in  Chicago  and  other  packing 
house  cities  issue  certificates  covering  grade  and  quality,  inspec- 
tion being  made  in  the  packing  house.  The  New  York  Produce 
Exchange  appoints  private  concerns  as  official  inspectors  for  the 
performance  of  such  services  when  goods  arrive  in  New  York. 

Dried  Fruits.  Inspection  and  arbitration  covering  dried  fruits 
is  provided  by  the  Dried  Fruit  Association  of  California  and  by 
similar  organizations  in  other  sections.  Certificates  are  issued 
covering  quality,  grade,  and  size. 

Canned  Goods.  The  National  Canners  Association  have 
established  standards  of  quality  and  grades  of  canned  foods  and 
issue  certificates  of  inspection  covering  these  points. 

Fish.  Export  shipments  of  fish  are  inspected  and  graded  by 
the  Preserved  and  Salt  Fish  Dealers  Association  of  New  York. 
Certificates  are  issued  covering  quality,  grade,  condition,  and  size. 

Cotton.  Ample  provision  is  made  for  the  inspection  and 
grading  of  Cotton  in  the  South  Atlantic  and  Gulf  ports.  The 
New  Orleans  Cotton  Exchange  is  a  notable  example.  Elaborate 
and  comprehensive  regulations  have  been  established  by  this 
exchange  for  scientific  grading  and  classification  of  cotton  ship- 
ments and  for  transportation,  storage,  and  weighing,  all  of  which 


PROTECTION  OF  THE  MERCANTILE  RISK        219 

is  conducted  under  careful  supervision.  These  standards  and 
grades  are  made  to  conform  with  the  regulations  of  the  United 
States  Department  of  Agriculture.  Certificates  are  issued  covering 
grade,  conditions,  and  weight. 

Cottonseed  Products.  The  Interstate  Cottonseed  Crushers 
Association  provides  for  the  inspection  and  grading  of  the  follow- 
ing products:  cottonseed  oil,  soap  stock,  cottonseed  cake,  cotton- 
seed meal,  cold  pressed  cottonseed,  linters,  hulls,  peanut  oil,  soya 
bean  oil,  and  cocoanut  oil.  Standards  for  quality  and  grade  are 
established  and  provision  is  made  for  sampling,  inspecting,  weigh- 
ing by  official  inspectors.     Certificates  of  quality  are  issued. 

Lumber.  Standards  of  grades  and  classifications  of  lumber 
have  been  established  by  various  organizations,  notably  the 
following : 

The  National  Hardwood  Lumber  Association 
The  Southern  Cypress  Manufacturers  Association 
The  Southern  Pine  Association 

The  specifications  for  grades,  sizes,  and  condition  of  lumber 
adopted  by  these  organizations  are  the  basis  for  official  inspection 
certificates  which  are  issued  by  each. 

Development  of  Certificate 

Irving  L.  Marsh,  a  traffic  manager  who  has  given 
thought  to  the  problem  presented,  has  proposed  that  the 
mercantile  risk  be  even  more  adequately  safeguarded  by 
the  creation  of  a  bureau  of  inspection  for  export  ship- 
ments. A  statement  of  the  plan  he  has  formulated  is  as 
follows : 

There  is  a  very  pressing  and  definite  need  under  existing  con- 
ditions of  some  agency  through  which  the  interests  of  the  foreign 
buyer  could  be  effectively  protected  and  the  responsibility  placed 
in  regard  to  delayed  shipments — damaged  merchandise  and  mer- 
chandise not  of  the  quality  purchased.  It  is  probably  safe  to  say 
that  the  shipment  which  reaches  its  destination  without  giving 
rise  to  any  complaint  or  claim  is  the  exception  rather  than  the 
rule.  It  is  worthy  of  note  that  consignees  under  letters  of  credit 
are  beginning  to  demand  unusual  guarantees  in  the  form  of  con- 
sular vises,  affidavits,  certificates  of  quality  and  other  conditions, 


220  AMERICAN  COMMERCIAL  CREDITS 

many  of  which  the  banks  are  unwilling  or  unable  to  comply  with. 
The  conditions  against   which   the   complaints   arise   may   be 
classified  as  follows : 

1.  Dispatch  of  shipment: 

(a)  Bills  of  Lading  are  frequently  issued  when  steamer 

has  not  even  arrived  in  port  or  is  undergoing  re- 
pairs or  for  other  reasons  is  subject  to  delay. 

(b)  Merchandise  is   often   "shut  out"   with   or  without 

intention. 

(c)  Another  steamer  is   sometimes  substituted. 

(d)  The  steamer  may  take  several  ports  of  call  before 

arriving  at  the  destination  of  the  shipment — ^all 
without  knowledge  of  the  consignee. 

All  of  these  conditions  seriously  affect  the  consignee  in  his 
ability  to  fulfill  his  contracts  and  cause  him  losses  in  a  falling 
market.  These  facts  are  never  evident  on  the  bill  of  lading  and 
the  practice  of  issuing  bills  of  lading  is  greatly  abused  since  the 
advent  of  many  new  and  unreliable  steamship  companies.  An 
investigation  of  all  the  circumstances  surrounding  each  shipment 
is  beyond  the  scope  of  a  bank's  activities. 

2.  Condition  of  shipment: 

(a)  The  delivery   of  merchandise  of  a   quality  not  as 

ordered  may  be  due  to  several  causes,  i.e.,  bad 
faith  on  the  part  of  the  exporter,  carelessness  in 
his  deliveries — fault  of  his  suppliers  or  mis-delivery 
of  railroads — cross-deliveries  by  the  steamer  on 
account  of  inadequate  or  improper  marking. 

(b)  Damage  or  partial  loss  of  contents  may  be  due  to 

improper  packing  (including  failure  to  recondi- 
tion), rough  handling  and  in  shipments  of  bags  the 
use  of  hooks  (a  very  prevalent  and  pernicious 
practice). 

The  steamer  bill  of  lading  does  not  reveal  these  condi- 
tions since  in  practice  exceptions  are  omitted  under 
guaranty  of  the  shipper.  The  banks  are  of  course  unable 
to  determine  the  condition  of  the  shipment  and  the  con- 
signee is  without  protection. 


PROTECTION  OF  THE  MERCANTILE  RISK        221 

In  every  export  shipment  at  least  five  interests  are  involved, 
i.e.,  the  shipper,  the  carrier,  the  insurance  underwriter,  the  bank 
and  the  consignee.  Even  where  the  principals  are  parties  of  high 
standing  and  reliability,  the  impossibility  of  definitely  placing  the 
responsibility  for  loss,  is  always  a  serious  obstacle  in  effecting  an 
equitable  adjustment. 

The  purpose  of  the  plan  proposed  is  to  supply  an  additional 
document  of  a  thoroughly  reliable  nature  which  will  reveal  all 
the  pertinent  conditions  of  the  shipment  so  that  the  consignee, 
his  agent,  or  other  intermediaries  in  the  negotiation  of  the  draft 
are  in  possession  of  all  information  required  for  full  protection. 
Incidentally,  this  plan  will  make  it  possible  to  definitely  fix  re- 
sponsibility in  the  event  of  a  controversy,  and  furthermore  will 
be  effective  in  discouraging  many  pernicious  practices  which 
operate  to  nullify  all  attempts  to  expand  American  commerce. 

The  Advisory  Committee  on  Commercial  Disputes  in 
Foreign  Trade,  which  was  constituted  in  1921  at  the 
suggestion  of  Secretary  of  Commerce  Herbert  Hoover, 
by  representative  banking  and  mercantile  associations  to 
consider  steps  to  be  taken  to  prevent  trade  disputes 
arising  from  foreign  transactions,  after  due  consideration 
recommended  as  an  ultimate,  fundamental  need,  some 
agency  "to  provide  that  before  shipment  the  quality  of 
merchandise  may  be  authoritatively  passed  on.  This," 
their  report  continues,  "would  prevent  in  the  great 
majority  of  cases  refusals  of  merchandise  at  destination 
on  grounds  of  alleged  defects." 

The  general  recognition  of  the  need  of  an  adequate 
protection  of  this  character,  for  both  buyer  and  seller, 
has  encouraged  Mr.  Marsh  to  form  a  company,  consisting 
of  men  themselves  disinterested  in  merchandising  opera- 
tions, which  oflfers  a  service  which  consists  in  brief  of 
checking  up  the  contract  of  sale  upon  delivery  to  steamer. 
A  certificate  of  survey  is  issued  covering  in  detail  the 
facts  relating  to  dispatch  of  shipment,  condition  of  pack- 
ing,  port-marks,   brand-marks,   quantities,   and   stowage. 


2  22  AMERICAN  COMMERCIAL  CREDITS 

Samples  are  drawn  from  the  merchandise  as  delivered 
and  filed  under  seal  for  reference.  Certificates  of  quality- 
are  issued  if  required.  A  system  of  registration  of 
samples  is  also  maintained  to  facilitate  greater  accuracy 
in  the  sale  of  merchandise  by  sample. 

Engineer's  Certificate 

If  the  commercial  letter  of  credit  is  intended  to  finance, 
for  instance,  shipments,  in  various  parts,  of  a  complete 
unit,  it  is  not  uncommon  to  stipulate  that  the  beneficiary 
must  provide  an  engineer's  certificate  with  each  shipment, 
indicating  that  the  part  in  question  has  been  properly 
constructed  and  is  being  sent  forward  in  proper  relation 
to  the  whole.  Of  a  somewhat  similar  character  is  the 
Lloyds  certificate  issued  with  relation  to  ship's  plates. 

Payment  of  a  Percentage 

Where  other  plans  of  protection  seem  inadequate,  the 
buyer  can  offer  the  seller  a  commercial  letter  of  credit 
for,  say,  90  per  cent  of  the  invoice  cost  of  the  goods, 
and  by  thus  making  the  payment  of  approximately  all 
the  profit  contingent  upon  a  satisfactory  inspection  of 
the  goods,  upon  arrival,  secure  himself  against  anything 
except  flagrant  fraud.  And  to  the  buyer  who  chooses 
to  deal  with  a  seller  capable  of  deliberate  bad  faith,  we 
need  give  no  consideration,  for  he  deserves  none. 


CHAPTER  XV 

COLLATERAL  USES  OF  COMMERCIAL 
CREDITS 

An  Arrangement  for  Local  Credit 

Commercial  letters  of  credit  of  the  types  we  have 
been  considering  are  usually  not  available  to  the  bene- 
ficiary until  ocean  shipment  has  been  effected  and  he 
has  possessed  himself  of  the  shipping  documents.  It  is 
often  the  case,  however,  that  a  commercial  credit  is  issued 
in  favor  of  a  beneficiary  who  is  a  buying  agent,  or  who 
stands  in  some  other  confidential  relationship  with  the 
accredited  buyer.  Importers  of  rice  or  cotton,  for 
instance,  usually  find  it  to  their  advantage  to  send  buying 
agents  into  the  producing  districts  to  purchase  directly 
from  the  growers.  A  commercial  credit  which  gave  the 
buying  agent  authority  to  negotiate  documentary  drafts 
would  not  make  the  funds  available  to  assist  in  assem- 
bling the  merchandise  in  some  shipping  center,  unless 
local  bankers  could  be  persuaded  to  make  advances  against 
the  goods  in  the  belief  that  the  relative  drafts  and  docu- 
ments would  reach  them  in  due  course.  In  such  a  case 
the  importer  may  not  want  to  depend  on  the  good  graces 
of  local  banks  in  assisting  his  agent  in  assembling  the 
merchandise,  and  may  ask  his  bank  in  issuing  the  credit 
specifically  to  authorize  the  notifying  bank  to  do  so.  A 
credit  with  such  a  provision  is  known  as  a  "packing" 
credit  and  the  authorization  for  it  is  made  by  including 
in  the  instrument  the  so-called  "Red  Clause,"  which  reads 
as  follows: 


223 


2  24  AMERICAN  COMMERCIAL  CREDITS 

In  the  event  of (the  beneficiaries) 

informing  your  branch  at (location) that 

( they) require     temporary     advances 

to  enable (them) to  pay 

for  the (merchandise) for   the  purpose 

and  shipment  of which  this  credit  is  opened, 

your  branch  at (location) is  hereby  authorized 

to  make  such  advances,  which  are  to  be  repaid,  with  interest, 
from  the  payment  to  be  made  under  this  Credit,  I/We  undertake 

that   should   they   not   be   repaid    to   the   bank   by 

(beneficiaries) in    terms    of   and    during   the 

currency  of  this  Credit,  I/We  will  repay  them  with  interest 
accrued  to  date. 

It  is  understood  that  the  making  of  the  temporary  advances 

or    the    payment    to (beneficiaries) above 

referred  to  shall  be  optional  on  the  part  of  your  branch. 

This  credit  is  to  remain  in  force  after  the 19 

A  Means  to  Obtain  Local  Credit 

May  the  domestic  financing  of  a  beneficiary  who  is 
assembling  goods  for  shipment  be  undertaken  by  the 
notifying  bank,  or  by  any  local  bank  with  which  the 
instrument  is  deposited,  if  the  credit  is  in  the  circular 
form,  of  its  own  volition  and  on  its  own  responsibility, 
without  consultation  with  or  the  knowledge  of  the  open- 
ing bank  or  of  the  buyer?  If  sufficient  safeguards  can 
be  created,  business  of  this  character  would  naturally  be 
attractive,  as  the  fact  that  the  export  sale  of  the  goods 
has  already  been  eflfected  and  the  means  for  the  reim- 
bursement of  the  seller  already  furnished,  makes  it  abso- 
lutely self -liquidating. 

Not  all  types  of  credit  furnish  adequate  safeguards. 
If  it  is  in  the  circular  form,  a  mere  deposit  of  the 
instrument  will  not  prevent  the  beneficiary  from  negotiat- 
ing drafts  elsewhere,  unless,  as  is  usually  the  case,  it 
stipulates  that  drafts  negotiated  must  be  indorsed  there- 
on.    Though  forms  of  commercial  credits  may  differ  in 


COLLATERAL  USES  225 

other  particulars,  each  is  alike  in  relieving  the  beneficiary 
of  the  burden  of  financing  the  overseas  shipment  of  the 
merchandise.  Whether  it  be  a  confirmed  or  irrevocable 
credit,  or  simply  an  authority  to  purchase,  it  accomplishes 
this  end.  As  we  come,  however,  to  consider  the  extent 
to  which  a  commercial  credit  can  be  used  as  security  for 
domestic  financing,  we  find  it  to  be  of  little  value  unless 
it  is  irrevocable. 

That  fact  can  be  best  appreciated  by  taking,  for 
illustration,  the  case  of  an  exporter  who  is  without  cap- 
ital and  cannot  command  credit  at  his  bank,  but  who 
has  been  fortunate  enough  to  secure  an  order  for  a  cargo 
of  coal  at  $15  per  ton,  c.i.f.  foreign  port,  from  a  buyer 
who  has  established  a  commercial  credit  in  his  favor  for 
his  reimbursement.  In  what  ways  may  the  commercial 
credit  be  used  to  assist  him  in  executing  the  order? 

I.  Transfer  in  Whole 

Our  seller  may  find  a  local  merchant  who  is  able  and 
ready  to  make  the  shipment  and  provide  him  with  the 
c.i.f.  documents  stipulated  in  the  credit  for  $14.50  per 
ton.  The  local  merchant,  however,  for  his  own  protec- 
tion during  the  period  in  which  he  is  assembling  the 
cargo,  and  for  his  reimbursement  after  shipment  has  been 
effected,  will,  in  turn,  require  a  commercial  credit.  The 
seller  therefore  asks  the  bank  which  has  notified  him  of 
the  opening  of  the  credit,  or  with  which  he  has  deposited 
it,  to  open  a  subsidiary  credit  for  his  account  in  favor 
of  the  local  merchant,  identical  in  terms  except  that  the 
price  will  be  $14.50  instead  of  $15  per  ton. 

Many  of  our  banks  have  declined  to  undertake  such 

an  operation  for  a  beneficiary  for  whom  they  would  not 

independently  undertake  operations,  but  in  so  doing  they 

have  declined  an  opportunity  to  make  a  double  commis- 

15 


226  AMERICAN  COMMERCIAL  CREDITS 

sion  on  one  risk;  in  fact  the  operation  can  be  tripled  or 
quadrupled.  The  beneficiary  of  the  subsidiary  credit  may 
himself  be  simply  a  broker  who  has  purchased  at  $14 
from  another  broker,  who,  in  turn,  has  purchased  at 
$13.50  per  ton  from  the  actual  supplier  and  shipper. 

The  one  precaution  necessary  to  make  the  piling  up 
of  these  subsidiary  credits,  one  on  the  other,  a  safe  and 
profitable  operation,  is  to  procure  from  each  transferor, 
at  the  time  he  requests  a  transfer,  his  own  invoice  at  his 
contract  price.  The  bank  has,  of  course,  no  right  to 
disturb  the  relationship  of  the  parties  to  the  various  con- 
tracts of  sale.  It  must  be  in  position  to  present  the 
invoice  of  the  proper  seller  to  each  buyer.  With  these 
invoices  in  its  possession,  the  bank  is  amply  protected 
against  any  emergency.  When  the  actual  supplier  and 
shipper  of  the  coal  presents  his  documents  they  will,  if 
they  conform  to  the  terms  of  his  subsidiary  credit,  comply 
with  the  terms  of  all  the  other  credits,  as  they  are  all 
identical  except  as  to  price.  The  bank  will  then  pay 
the  supplier  $13.50  per  ton  and  give  his  invoice  to  the 
last  broker,  paying  him  50  cents  per  ton,  less  the  bank's 
commission  for  issuing  a  subsidiary  credit.  The  last 
broker's  invoice  at  $14  will  then  be  turned  over  to  the 
intermediate  broker  with  the  payment  of  50  cents  per 
ton,  less  commission.  The  invoice  of  the  intermediate 
broker  at  $14.50  will  then  be  turned  over  to  the  first 
broker  with  the  payment  of  50  cents  per  ton,  less  com- 
mission, and  his  invoice  at  $15  per  ton  with  the  remain- 
ing documents  which  have  been  successfully  applied  to 
each  credit  will  be  sent  abroad  to  the  opening  bank,  thus 
completing  the  transaction.  The  opening  bank  and  the 
foreign  buyer  will,  of  course,  be  unaware  of  the  existence 
of  the  subsidiary  financing. 

The  local  bank  can  undertake  such  operations  with 


COLLATERAL  USES  227 

equal  safety  though  the  original  credit  be  revocable,  pro- 
viding the  subsidiary  credits  are  revocable  also,  as  the 
subsidiary  credits  can  be  simultaneously  canceled  in  case 
of  the  cancellation  of  the  original  credit.  However,  it 
is  rarely  indeed  that  the  actual  supplier  is  ready  to  char- 
ter his  vessel,  load  it,  insure  the  cargo,  and  take  the  risk 
that  upon  presentation  of  documents  he  may  be  told  that 
the  credit  has  been  canceled.  To  be  of  much  practical 
use  for  the  purpose  of  transfer,  therefore,  the  original 
credit  must  be  irrevocable. 

2.  Transfer  in  Part 

Let  us  now  assume  that  our  seller  has  found  a  local 
coal  dealer  who  is  prepared  to  deliver  the  coal  on  board 
a  vessel,  a  carrier  who  has  a  vessel  ready  to  receive  it, 
and  an  insurance  company  which  is  prepared  to  insure 
the  cargo.  Each  stipulates  that  the  seller  must  furnish  a 
commercial  credit  for  its  reimbursement.  The  seller 
can  then  ask  the  local  bank  to  open  subsidiary  credits  in 
favor  of  coal-owner,  carrier,  and  insurance  company, 
identical  in  terms,  except  that  the  first  credit  will  under- 
take to  pay  the  coal-owner  $5  per  ton  for  the  coal  sup- 
plied, the  second  to  pay  the  carrier  $8  per  ton  for  ocean 
freight,  and  the  third  to  pay  the  insurance  company  $1 
per  ton  for  insurance.  Each  subsidiary  credit,  while 
requiring  a  complete  set  of  shipping  documents,  will  con- 
tain a  statement  to  the  eflPect  that  it  is  understood  that 
the  bill  of  lading  is  to  be  furnished  by  the  coal-owner, 
the  freight  bill  by  the  carrier,  and  the  insurance  policy 
by  the  insurance  company.  When  shipment  has  been 
eflFected  the  carrier  will  send  the  bill  of  lading  to  the 
bank,  to  be  surrendered  to  the  owner  of  the  coal  when 
the  bank  pays  the  carrier  his  freight  money,  while  the 
owner  of  the  coal  will  surrender  it  to  the  bank  against 


228  AMERICAN  COMMERCIAL  CREDITS 

payment  of  his  invoice  for  the  coal.  At  the  same  time 
a  representative  of  the  insurance  company  appears  with 
the  policy,  to  be  surrendered  against  payment  of  its  bill 
for  premium.  The  successful  operation  of  such  a  credit 
requires  some  co-operation  among  the  various  partial 
transferors,  but  by  working  together  they  can  make  the 
transaction  run  smoothly.  The  bank  takes  no  risk,  as 
it  has  not  committed  itself  to  pay  anyone  until  the  trium- 
virate have  presented  it,  collectively,  a  complete  set  of 
documents.  When  these  are  at  hand  each  is  paid  his 
share,  totaling  $14  per  ton,  and  their  invoices  are  sur- 
rendered to  the  original  beneficiary  against  his  invoice  at 
$15,  which  is  sent  overseas  with  the  documents.  Such  an 
arrangement  is  hardly  of  practical  use  unless  the  original 
credit  is  irrevocable. 

3.  Assignment 

Instead  of  asking  the  issuance  of  a  subsidiary  credit, 
the  beneficiary  may  request  the  bank  which  has  notified 
him  of  the  issuance  of  the  credit  to  assign  it  to  his 
supplier.  He  may  simply  notify  the  bank  that  he  has 
assigned  it  to  the  supplier  or  the  supplier  may  notify  the 
bank  of  the  assignment.  There  is  much  uncertainty 
among  the  American  banks  as  to  their  duty  under  any 
one  of  these  circumstances.  The  Federal  Reserve  Board 
questionnaire  made   this   inquiry: 

Do  you  permit  a  beneficiary  to  assign  his  credit  (all  rights)  to 
another  person  and  have  the  documents  presented  in  the  bene- 
ficiary's name  and  not  in  the  name  of  the  party  to  whom  the 
credit  was  transferred? 

Dr.  Edwards*  analysis  of  the  answers  is  as  follows: 

Yes,  26;  No,  30. 

(a)  When  it  is  desired  to  make  a  credit  available  for  one  or 


COLLATERAL  USES  229 

more  persons  other  than  the  beneficiary,  it  is  usually  so  opened. 
As  bankers'  letters  of  credit  are  negotiable  in  character  it  is 
always  possible  for  the  beneficiary  to  assign  to  another  person  by 
drawing  his  draft  or  giving  a  sufficient  power  of  attorney. 

(b)  We  do  not  permit  a  beneficiary  to  assign  his  credit  to 
another  person  unless  especially  authorized  to  do  so  by  the  bank 
for  whom  the  credit  is  opened. 

(c)  If  the  credit  is  assigned  to  another  person  it  must  be 
done  in  writing  and  the  drafts  must  be  drawn  by  the  person  to 
whom  the  credit  is  assigned,  and  must  be  in  every  way  in  accord- 
ance with  the  terms  of  the  credit. 

(d)  If  transfer  is  agreed  to,  then  all  documents  subsequently 
presented  must  be  in  the  name  of  the  new  party. 

The  results  of  the  above  answers  indicate  that  there  is  no 
definite  usage  regarding  the  assignment  of  credits  to  persons  other 
than  the  beneficiary  named  in  the  credit  letter.  Some  banks  freely 
permit  this  practice  (a),  but  it  is  customary  to  grant  this  privilege 
only  with  the  consent  of  the  bank  authorizing  the  credit  (c). 
When  documents  are  later  presented  to  the  bank  for  payment, 
they  are  then  surrendered  in  the  name  of  the  original  beneficiary 
and  not  in  the  name  of  the  new  party  (c,d). 


From  a  legal  aspect  there  is  probably  no  obligation 
on  a  bank  to  recognize  such  attempts  at  assignment,  as 
the  inchoate  right  of  the  beneficiary  to  receive  payment 
after  the  performance  of  the  conditions  stipulated  in 
the  credit  is  too  intangible  to  be  the  subject  of  assign- 
ment. Undoubtedly  the  beneficiary  of  such  a  credit  can, 
upon  presenting  the  stipulated  documents  to  the  bank 
w^hich  is  to  effect  payment  and  thus  entitling  himself  to 
receive  the  money,  make  a  valid  assignment  of  that  right 
to  a  third  party.  The  beneficiary  might  virtually  effect 
an  assignment  piecemeal  by  filing  with  the  negotiating 
bank  a  power  of  attorney  authorizing  whomever  he  desires 
to  draw  in  his  name  against  any  funds  which  might  be 
due  under  the  credit.  Drafts  might  then  be  forwarded 
to  the  notifying  bank  attached  to  the  necessary  docu- 


230  AMERICAN  COMMERCIAL  CREDITS 

ments.  The  objection  to  this  procedure  from  a  practical 
point  of  view,  so  far  as  protection  is  concerned,  is  that 
such  a  power  of  attorney  is  revocable.  The  beneficiary, 
by  revoking  it,  could  thereby  deprive  his  supplier  of  any 
protection  which  had  been  afforded  by  the  granting  of 
the  power  of  attorney.  Assignment  does  not  appear 
to  afford  to  the  supplier  of  the  goods  absolute  protection. 

4.  Security  for  Domestic  Commercial  Credit 

Let  us  suppose  that  the  order  and  commercial  credit 
which  our  impecunious  exporter  has  received  do  not  call 
for  the  shipment  of  a  commodity  like  coal,  which  is 
usually  purchasable  for  export  at  seaboard,  but  for  some 
commodity  that  is  customarily  sold  f.o.b.  factory  at 
some  inland  point.  Let  us  say  that  the  order  and  credit 
relate  to  the  overseas  shipment  of  an  automobile  at  $1,500, 
c.i.f.,  which  is  sold  by  the  manufacturer  for  $1,000,  f.o.b. 
cars,  factory,  Detroit.  The  issuance  of  a  subsidiary  credit 
on  identical  terms  to  the  Detroit  manufacturer  will  not 
bridge  the  gap  in  this  instance.  What  risk  would  the 
local  bank  assume  by  issuing  a  commercial  credit  for 
the  account  of  the  exporter  in  favor  of  the  Detroit  manu- 
facturer, available  against  railroad  bill  of  lading  and  an 
invoice  for  an  automobile  at  $1,000,  f.o.b.  cars,  Detroit? 
Perhaps  the  most  serious  risk  relates  to  the  expiration 
date  of  the  overseas  credit.  The  date  of  shipment  from 
Detroit  must  be  fixed  in  the  domestic  credit  at  a  period 
sufficiently  in  advance  of  the  expiration  date  of  the 
export  credit  to  insure  that  the  merchandise  can  reach 
seaboard,  be  packed  for  export,  and  the  ocean  bill  of 
lading  obtained  within  the  life  of  the  export  credit.  Con- 
sideration must  also  be  given  to  the  question  of  cost,  so 
that  the  cost  of  the  freight  to  New  York,  packing  for 
export,  ocean  freight  and  insurance  will  be  within  the 


COLLATERAL  USES  231 

$500  margin  between  the  domestic  purchase  and  foreign 
sale  price.  If  these  matters  are  satisfactorily  disposed 
of,  the  operation  can  be  undertaken  without  further  risk. 
The  negotiable  bill  of  lading  is  surrendered  into  the  hands 
of  the  bank  which  has  issued  the  domestic  credit  at 
the  time  the  automobile  manufacturer  receives  his 
payment.  This  document,  which  controls  possession 
of  the  automobile,  can  be  surrendered  by  the  bank  to  a 
reliable  forwarder  against  his  obligation  to  furnish  the 
bank  an  ocean  bill  of  lading  made  out  in  accordance  with 
the  terms  of  the  export  credit.  When  this  bill  of  lading 
is  delivered  to  the  issuing  bank  it  can  assemble  the  insur- 
ance policy  and  beneficiary's  invoices,  liquidate  its  own 
advance,  and  pay  the  difference  to  the  beneficiary  as  his 
profit. 

Broaden  the  Field  of  Usefulness 

The  transfer  of  a  credit  in  whole  may  be  made,  in 
safety  both  to  the  transferring  bank  and  the  transferee, 
without  inquiring  far  into  either  the  financial  strength  or 
moral  attributes  to  the  beneficiary  who  requests  it.  Trans- 
fer in  part  may  be  similarly  made,  but  as  between  trans- 
ferees there  is  some  degree  of  dependence  on  each  other's 
ability  to  perform  their  part  in  the  transaction.  Assign- 
ment is  safe  from  the  bank's  point  of  view,  but  its  use- 
fulness to  the  assignee  is  dependent  upon  the  beneficiary's 
integrity.  The  use  of  an  export  credit  as  security  for 
a  domestic  credit  demands  not  simply  integrity,  but  also 
business  ability  from  the  beneficiary,  so  that  the  hiatus 
between  the  domestic  and  foreign  shipment  may  be  filled 
without  miscalculation.  Used  in  its  proper  place,  how- 
ever, and  with  due  appreciation  of  the  elements  of  risk 
involved,  any  of  these  methods  broadens  the  field  of 
usefulness  of  the  overseas  commercial  letter  of  credit. 


CHAPTER  XVI 

THE  LETTER  OF  CREDIT  AS  A  TRADE 
WEAPON 

Disappearing  Export  Merchants 

During  the  war  period,  when  credit  expansion  was 
the  order  of  the  day,  the  number  of  export  merchants 
and  commission  houses  operating  in  New  York  enlarged 
in  proportion  to  the  increased  volume  of  business.  In 
that  time  of  constantly  rising  merchandise  values  and 
easy  money  it  was  not  difficult  for  these  houses  to  secure 
commercial  letters  of  credit  from  foreign  buyers  and  to 
obtain  enough  domestic  credit  from  local  suppliers  to 
bridge  the  gap  until  shipment  was  made. 

During  the  present  period  of  credit  contraction,  these 
houses  have  found  both  these  tasks  increasingly  difficult. 
The  domestic  seller  now  requires  cash  against  railroad 
bill  of  lading,  dock  or  warehouse  receipt.  The  foreign 
buyer  feels  that  he  is  now  trading  in  a  buyer's  market 
and  is  entitled  to  ask  the  export  merchant  to  draw  on 
him.  As  the  gap  has  widened,  export  merchants  and 
export  commission  houses  have  fallen  through  to  oblivion. 
If  this  situation  continues  only  houses  with  ample  capital 
and  liberal  bank  credit  can  survive. 

Lessened  Distributing  Power 

Some  deflation  of  our  export  machinery  was  inevitable 
and  advisable.  There  was  a  salutary  effect  to  be  derived 
from  the  elimination  of  incompetent  and  dishonorable  mer- 
chants.   That  accomplished,  there  is  left  a  body  of  skilful 

232 


LETTER  OF  CREDIT  AS  A  TRADE  WEAPON      233 

and  reliable  foreign  traders  whose  continued  application  to 
the  problem  of  exporting  our  surplus  products  is  a  national 
necessity.  Their  aid  is  needed,  not  as  clerks  or  even  as 
officials  in  large  export  houses,  but  as  they  are  at  present — 
independent  merchants  with  the  initiative,  versatility,  and 
adaptability  that  come  with  small  owner-managed  con- 
cerns. If  it  is  possible  to  do  so — and  it  is — this  dis- 
tributing power  must  be  maintained  for  the  beneficial 
contribution  it  can  make  to  the  problem  of  marketing  the 
last  20  per  cent  of  our  national  production,  which  is  the 
profit-maker. 

A  Fair  Policy 

It  is  a  fair  question  to  ask  whether  the  richest  and  most 
powerful  nation  on  earth  should  add  to  the  difficulties  of 
our  prospective  customers,  already  almost  overwhelmed  by 
the  exchange  situation,  by  forcing  them  to  continue  to 
bear  the  burden  of  supplying  bank  security.  Can  we 
afford  to  require  them  to  establish  commercial  letters  of 
credit  to  save  our  small  exporters  from  extinction?  The 
answer  is  not  the  one  that  at  first  glance  would  appear 
obvious.  The  extension  of  the  use  of  commercial  credits, 
far  from  handicapping  our  foreign  trade,  will  be  found  to 
put  it  on  a  more  solid  basis  than  can  be  attained  in  any 
other  fashion.  It  is  in  fact  only  in  this  way  that  it  can 
hope  to  retain  its  vitality  through  the  period  now  facing  it. 

No  matter  how  overburdened  with  goods  our  shelves 
may  be,  no  matter  though  the  deluge  of  inflowing  gold 
glut  our  vaults  and  our  banks  cry  out  for  business  to 
finance,  we  cannot  escape  disaster  unless  the  credit  we 
extend  our  foreign  customers  is  on  a  fundamentally  sound 
basis.  Plan  after  plan  has  been  devised  to  aid  our  export 
trade,  by  the  extension  of  governmental  aid  and  the  crea- 
tion of  new  types  of  banking  institutions,  but  they  have 


234  AMERICAN  COMMERCIAL  CREDITS 

all  been  sterile  of  results  because  they  cannot  escape  the 
fundamental  proposition  that  what  we  need  is  not  in- 
creased banking  facilities,  but  better  banking  risks.  If  the 
commercial  credit  plan  is  calculated  to  secure  the  risk  in 
better  fashion  than  is  possible  under  any  other  plan,  if  it 
can  be  used  in  such  a  fashion  that  the  actual  financing  will 
be  done  by  American  banks  and  the  funds  required  for  the 
transaction  be  obtained  from  the  American  discount 
market,  and  if  all  this  can  be  accomplished  at  a  cost  which 
is  in  the  final  analysis  less  than  any  other  method,  then  it  is 
not  simply  a  fair  policy,  but  the  only  sound  policy  to  adopt. 

The  Local  Banker 

Modern  business  has  never  seen  an  era  in  which  it  has 
been  so  difficult  to  gauge  a  credit  risk.  The  whole  world  is 
in  a  political  and  economic  condition  so  abnormal  that 
ordinary  signs  and  precedents  have  lost  their  virtue.  The 
movement  of  events  is  too  rapid  to  afford  adequate  protec- 
tion to  one  who  is  not  in  intimate  contact  with  the  local 
conditions  surrounding  a  debtor.  Even  in  normal  times  the 
source  to  which  a  merchant  should  naturally  turn  for 
credit  is  his  local  banker.  His  banker  not  only  can  judge 
the  safety  of  the  individual  risk  but,  with  his  institution 
being  the  reservoir  of  the  liquid  funds  of  the  community, 
can  sense  the  credit  situation  in  its  larger  aspects.  Cer- 
tainly then,  when  American  merchants  turn  to  the  foreign 
field  under  conditions  which  accentuate  the  credit  risk, 
there  is  no  other  way  in  which  they  can  obtain  the  protec- 
tion which  is  afforded  through  its  evaluation  by  the  buyer's 
bank. 

A  Corrective  against  Overbuying 

In  both  domestic  and  foreign  trade,  any  method  of 
financing  which  places  on  the  seller  the  burden  of  furnish- 


LETTER  OF  CREDIT  AS  A  TRADE  WEAPON      235 

ing  the  capital  or  credit  to  carry  merchandise  during  the 
period  of  transit,  and  particularly  during  the  period  re- 
quired to  liquidate  it  after  arrival,  is  inherently  weak. 
Credit  may  be  overexpanded,  though  the  sellers  are  amply 
good  for  the  credit  given  them.  It  is  the  ability  of  the 
buyer  to  liquidate  his  purchase  which  supplies  the  pre- 
ventative against  overexpansion.  If  the  seller  draws  on 
the  buyer,  and  then  discounts  the  draft,  the  buyer  can 
accept  the  draft  upon  presentation,  but  postpone  until 
maturity  consideration  of  how  he  is  to  pay  it.  If,  how- 
ever, at  the  time  he  places  his  order,  he  is  required  to  see 
his  bank  and  arrange  for  ultimate  liquidation  of  the  draft, 
he  will  be  forced  to  consider  his  transaction  from  its  finan- 
cial aspect  from  the  outset.  He  will  also  have  the  benefit 
at  that  time  of  the  vision  of  his  banker,  who  might  sug- 
gest factors  which  had  not  hitherto  entered  into  his  calcu- 
lation. Recent  American  experience  with  the  trade 
acceptance  has  demonstrated  its  ineffectiveness  as  a 
safeguard  against  inflation ;  the  commercial  letter  of  credit 
appears  calculated  to  supply  the  corrective. 

Mr.  Alder,  in  the  article  already  referred  to  (page  95), 
has  given  convincing  testimony  on  this  point.  He 
says: 

In  October,  191 9,  at  Atlantic  City,  during  the  International 
meeting  called  by  the  Chamber  of  Commerce  of  the  United  States, 
the  President  of  a  large  financial  institution  of  New  York  City 
made  a  statement  to  the  effect  that  the  American  exporter  was 
entitled  to  be  paid  cash  upon  delivery  of  his  shipping  documents 
to  the  banker  and  that  such  payment  should  be  without  recourse 
to  the  exporter,  and  that  American  foreign  trade  could  not  be 
maintained  or  increased  if  the  bankers  insisted  that  recourse  to  the 
exporter  continued  until  all  the  bankers  participating  in  the 
financing  of  the  transaction  were  paid. 

Had  this  policy  been  followed  it  is  quite  likely  that  American 
foreign  trade  would  now  be  in  a  very  much  more  satisfactory 


236  AMERICAN  COMMERCIAL  CREDITS 

position  both  from  a  banking  and  from  a  commercial  point  of 
view.  It  might,  in  fact  it  undoubtedly  would,  have  curtailed  orders 
to  some  extent  during  the  recent  boom  period,  but  both  the 
American  banks  and  the  American  exporters  would  not  have  been 
in  the  condition  of  carrying  unpaid  accounts  and  unliquidated 
merchandise  abroad,  as  has  been  the  case  during  the  past  year. 
This  unsatisfactory  condition  is  largely  due  to  the  lack  of  proper 
or  adequate  financing  by  the  foreign  buyer  at  the  time  the  orders 
were  placed.  Had  the  foreign  buyer  been  required  to  arrange 
with  his  bank  for  the  necessary  financing  at  the  time  the  orders 
were  placed,  excessive  purchases  would  have  been  curtailed  and  the 
losses  to  American  exporters  and  banks  would  have  been  very 
much  reduced  and  the  general  result  would  be  that  American 
foreign  trade  would  be  in  a  prosperous  financial  position,  ready 
to  take  full  advantage  of  renewed  foreign  buying. 

The  American  exporter  cannot  evade  his  responsibility  for  the 
present  situation,  for  many  orders  were  accepted  without  due 
regard  to  the  necessity  of  financing  by  the  buyer,  and  many  of  the 
recent  losses  have  been  the  result  of  such  failure  to  properly 
investigate  the  actual  situation  and  take  the  necessary  protective 
measures. 


The  International  Banks 

In  the  same  way  as  the  local  banker  can  sense  the  local 
credit  situation  as  a  whole  and  thus  parcel  out  accommoda- 
tion to  local  merchants  according  to  their  merit,  so  our 
international  banks  can  estimate  the  amount  of  credit  that 
the  local  banks  of  any  one  foreign  country  are  entitled 
to  command  from  us.  It  is  exceptional  for  the  large 
American  banks  to  extend  credit  directly  to  foreign  mer- 
chants or  manufacturers.  Even  where  a  direct  relation- 
ship is  established  it  is  usually  under  the  guaranty  of  the 
foreign  customer's  local  bank.  On  the  other  hand,  it  is 
the  practice  of  our  international  bankers,  as  of  such 
bankers  everywhere,  to  offer  credit  to  deserving  foreign 
banks.  Our  bankers,  through  their  credit  departments, 
keep  in  touch  with  each  other's  commitments  of  this  char- 


LETTER  OF  CREDIT  AS  A  TRADE  WEAPON      237 

acter.  In  this  way  the  volume  of  American  bank  credit 
which  is  made  available  for  the  bankers  of  any  foreign 
country,  and  through  them  to  its  merchants,  expands 
under  the  stress  of  competition  and  contracts  when  its 
total  exceeds  the  margin  of  prudence.  Our  international 
banks  through  their  branches  and  affiliations  are  sensitive 
to  changes  in  foreign  financial  barometers  long  before  our 
merchants  can  see  the  clouds  overhead.  They  can  tell 
equally  well  when  the  storm  has  passed  before  the  evidence 
of  clearing  skies  has  reached  our  merchants.  It  is  difficult 
to  conceive  a  way  in  which  the  amount  of  our  short- time 
credit  to  which  any  foreign  country  may  be  entitled  can 
be  so  safely  controlled  as  by  rationing  it  to  its  merchants 
through  its  bankers. 

A  Warning 

Recently  a  Kansas  flour  mill  received  simultaneously 
tentative  orders  from  a  Scandinavian  and  a  Central  Euro- 
pean market.  The  Scandinavian  merchant  offered  to 
arrange  in  reimbursement  for  his  purchase  an  acceptance 
credit  through  his  own  bank  and  its  correspondent  bank  in 
America.  The  Central  European  merchant  stated  that  the 
cost  of  obtaining  a  bankers'  credit  was  prohibitive  and 
that  he  could  not  do  business  unless  the  seller  were  con- 
tent to  draw  on  him  at  sight.  There  could  be  no  better 
illustration  of  the  practical  operation  of  the  factors  which 
have  been  outlined  in  this  chapter  than  is  afforded  by  this 
example.  It  is  everywhere  recognized  that  the  political 
and  economic  condition  of  Scandinavia,  and  of  her  banks 
and  merchants,  is  more  stable  than  that  of  Central  Europe. 
The  result  is  that  Scandinavian  bankers  are  enabled  to 
obtain  from  American  banks  and  to  offer  to  our  prospec- 
tive Scandinavian  customers,  sufficient  banking  credit  to 
enable  them  to  furnish  commercial  letters  of  credit  to 


238  AMERICAN  COMMERCIAL  CREDITS 

American  merchants.  On  the  other  hand,  the  amount  of 
credit  which  American  banks  are  wilHng  to  give  to  Central 
European  banks  under  present  conditions  is  of  necessity 
limited.  Undoubtedly  the  Central  European  banks,  in 
rationing  the  small  stock  of  credit  at  their  disposal,  charge 
their  customers  a  larger  commission  than  would  be  usual 
in  normal  times,  but  it  is  more  than  likely  that  the  small 
Central  European  importer  is  deterred  from  offering 
credits,  not  because  of  the  cost,  but  because  the  Central 
European  bank  is  unwilling  under  present  conditions,  to 
give  him  part  of  its  slendor  stock  of  credit  at  any  price. 

The  American  merchant  who,  in  the  course  of  negotia- 
tion with  prospective  foreign  customers  at  the  present 
time,  is  met  with  the  plea  that  the  buyer  is  unwilling  to 
establish  a  commercial  credit  in  favor  of  the  seller,  should 
scrutinize  with  the  greatest  care  the  reasons  advanced  for 
the  refusal.  In  almost  every  case  it  will  be  found  that  the 
refusal  results  from  the  inability  of  the  buyer  to  obtain 
the  requisite  credit  from  his  local  bank,  or  from  the  in- 
ability of  the  local  bank  to  command  credit  from  American 
banks.  The  result  is  that  our  American  merchant  is  being 
invited  to  undergo  a  credit  risk  that  banks  which  are  in  a 
better  position  than  he  to  appraise  it,  have  declined.  It  may 
be  that  by  declining  to  do  business  except  on  commercial 
credit  terms  our  merchants  will  lose  business,  but  the 
business  they  lose  will,  for  the  most  part,  be  of  the  sort 
that  it  is  better  for  them  not  to  undertake. 

When  our  merchants  are  asked  to  draw  directly  on 
foreign  buyers  at  sight,  cash  against  documents,  there  is 
always  present  the  risk  of  having  dealings  with  a  rascally 
buyer  who  will  refuse  to  pay  the  draft  on  presentation  in 
the  expectation  that  the  seller  will  offer  a  rebate  rather 
than  seek  a  market  elsewhere.  In  these  times  of  violent  and 
sudden  fluctuations  of  values  and  exchanges  the  interval 


LETTER  OF  CREDIT  AS  A  TRADE  WEAPON      239 

between  dispatch  and  arrival  may  render  the  transaction 
so  unprofitable  that  a  buyer  who  would  resist  this  tempta- 
tion may,  in  desperation,  decide  to  risk  the  moral  and  legal 
consequences  of  rejection  rather  than  assume  the  ruinous 
obligation  of  payment.  When  short-term  credits  involving 
the  surrender  of  the  merchandise  to  the  buyer  are  required, 
the  risk  is  largely  accentuated.  Obviously  only  a  local 
banker  who  can  watch  the  buyer  during  the  interval  be- 
tween his  receipt  of  the  goods  and  payment,  has  an 
adequate  opportunity  to  scrutinize  and  safeguard  such 
accommodation.  There  is  an  obvious  advantage,  then,  in 
passing  short-term  credits  through  the  medium  of  the 
buyer's  local  bank,  if  the  local  bank's  correspondent  in  the 
United  States  can  handle  short-term  credits  in  sufficient 
volume. 

Our  Discount  Market  Supplies  the  Funds 

It  must  not  be  forgotten  in  this  connection  that  the 
burden  of  furnishing  the  funds  for  short-term  credits 
falls  ultimately  on  the  banks  in  any  event.  If  the  seller 
draws  directly  on  the  buyer,  the  seller  expects  his  bank  to 
discount  the  draft.  If  a  commercial  credit  is  employed  the 
only  difference  is  that  while  in  the  first  case  the  bank  has 
extended  credit  to  its  domestic  customer,  in  the  latter  it  has 
extended  it  to  the  foreign  bank.  The  drain  on  its  funds 
is  identical  in  either  case. 

Banks  are  simply  the  reservoirs  of  the  floating  liquid 
wealth  of  the  community.  The  extent  to  which  they  have 
funds  of  their  own  to  lend  depends  then  upon  the  volume 
of  trade  which  is  building  up  the  bank  deposits  which  give 
the  banks  their  lending  power.  In  an  era  of  falling  prices 
these  deposits  decrease  and  the  lending  power  of  the  banks 
diminishes  accordingly.  If  there  were  no  way  in  which 
our  banks  could  finance  foreign  trade  except  to  lend  their 


240  AMERICAN  COMMERCIAL  CREDITS 

funds,  the  volume  of  foreign  trade  would  of  necessity  have 
to  shrink  with  the  contraction  of  the  lending  power.  The 
Federal  Reserve  Act  has  adequately  safeguarded  our 
foreign  trade  against  such  a  situation  by  permitting  na- 
tional banks  to  lend,  not  cash,  but  credit,  by  accepting 
drafts  drawn  against  them,  having  not  more  than 
6  months'  sight  to  run,  which  grow  out  of  trans- 
actions involving  the  importation  or  exportation  of 
goods. 

Bank  Acceptances 

Member  banks  may,  with  the  approval  of  the  Federal 
Reserve  Board,  accept  such  bills  up  to  lOO  per  cent  of 
their  paid-up  and  unimpaired  capital  stock  and  surplus. 
Under  the  regulations  at  present  in  force,  federal  reserve 
banks  may  rediscount  any  such  bill  having  a  maturity  at 
time  of  discount  of  not  more  than  3  months,  exclusive  of 
days  of  grace,  which  has  been  drawn  under  a  credit 
opened  for  the  purpose  of  conducting  or  settling  accounts, 
resulting  from  a  transaction  or  transactions  involving  the 
shipment  of  goods  between  the  United  States  and  any 
foreign  country,  or  between  the  United  States  and  any  of 
its  dependencies  or  insular  possessions,  or  between  foreign 
countries.  The  board  has  further  ruled  that  6  months' 
bankers'  acceptances  issued  in  import  and  export  transac- 
tions are  eligible  for  open-market  purchases  by  federal 
reserve  banks. 

National  banks  may  properly  enter  into  agreements  for 
the  financing  of  transactions  of  this  character,  by  which 
they  obligate  themselves  to  accept  drafts  which  in  the 
aggregate  extend  over  a  period  longer  than  6  months.  The 
period  covered  by  such  an  agreement,  and  of  any  accept- 
ance made  in  connection  with  it,  must  not  exceed  the  usual 
or  customary  period  of  credit  required  to   finance  the 


LETTER  OF  CREDIT  AS  A  TRADE  WEAPON      241 

underlying  transaction,  or  the  period  reasonably  necessary 
to  finance  it. 

Comparative  Costs 

The  most  common  objection  interposed  by  a  foreign 
buyer  to  a  seller's  request  for  a  commercial  letter  of  credit 
is  its  cost.  In  answering  this  objection  the  seller  does  not 
necessarily  have  to  choose  between  declining  the  business 
or  choosing  to  take  the  risk  of  drawing  on  the  buyer.  He 
can  regard  the  cost  of  obtaining  a  credit  as  an  insurance 
premium  and  agree  to  assume  it  himself.  On  a  basis  of 
comparative  costs  this  plan  provides  cheaper  and  more 
comprehensive  insurance  than  is  furnished  by  any  other 
plan  which  has  been  suggested.  While  local  custom  and 
the  safety  of  the  individual  risk  are  the  deciding  factors 
determining  the  charge  which  the  opening  bank  exacts 
from  the  accredited  buyer  for  its  own  commission,  it  is 
usually  around  ^  per  cent  for  sight  credits.  The  basic 
international  rate  charged  by  correspondents  for  effecting 
documentary  payments  is  ^  per  cent,  and  this  rate  is 
shaded  where  there  is  any  considerable  volume  of  business. 
For  confirming  credits  it  has  been  customary  abroad  to 
double  the  commission,  and  that  practice  is  in  course  of 
adoption  here.  These  three  charges  make  the  total  cost 
of  a  confirmed  sight  credit  approximately  }i  per  cent. 

Unfortunately  there  is  no  basis  on  which  to  compare 
this  cost  with  the  cost  of  insuring  the  credit  risk  in  the 
normal  fashion,  because  there  are  no  companies  which 
make  a  general  business  of  undertaking  this  class  of  risk. 
The  British  government  attempted  in  1920  to  insure  the 
credits  of  its  merchants  who  were  dealing  with  the  weaker 
nations  of  Central  Europe,  by  subsidizing  a  company 
which  had,  however,  to  place  such  restrictive  conditions 
upon  the  risks  that  the  plan  proved  abortive. 
16 


242  AMERICAN  COMMERCIAL  CREDITS 

During  the  past  year  a  solution  has  been  attempted  by 
some  middle  western  American  merchants  by  the  forma- 
tion of  a  co-operative  insurance  company.  This  company 
plans,  however,  to  insure  simply  the  risk  of  the  buyer's 
insolvency  and  that  only  in  the  case  of  buyers  in  the  zones 
covered  by  its  service  who  have  been  investigated  and 
found  to  be  financially  responsible.  It  does  not  plan  to 
insure  the  risk  of  rejection  which  customarily  causes  more 
trouble  and  loss  than  insolvency.  It  is  not  yet  possible  to 
ascertain  the  cost  of  this  insurance,  as  it  is  planned  that 
the  initial  premium  is  to  be  determined  by  the  normal  aver- 
age exports  and  is  to  be  adjusted  at  the  end  or  during  the 
course  of  the  year  to  the  actual  transactions  covered. 
This  plan  is  open,  therefore,  to  the  objection  that  it  covers 
only  a  small  portion  of  the  risk  and  that  only  in  connection 
with  certain  approved  names,  and  that  it  is  impossible  to 
calculate  its  cost  at  the  time  the  sale  is  made. 

It  is  entirely  safe  to  say  that  the  cost  of  this  or  any 
other  insurance  plan  cannot  be  brought  below  that  of  the 
commission  charged  for  establishing  bankers*  credits, 
because  the  banks  need  set  up  no  new  machinery  to  under- 
take the  operation  but  can  absorb  the  operation  in  their 
regular  daily  routine.  The  commercial  letter  of  credit, 
therefore,  furnishes  comprehensive  insurance  through 
existing  agencies  at  a  minimum  cost,  and  affords  just  the 
sort  of  protection  that  both  British  and  American  mer- 
chants have  found  indispensable  under  existing  conditions. 
This  protection  is  worth  paying  for,  and  American  houses 
can  better  afford  to  pay  it  themselves  than  to  take  the  risk 
that  otherwise  exists. 

A  Typical  Instance 

The  O.  and  W.  Thum  Company  of  Grand  Rapids, 
Michigan,  makers  of  Tanglefoot  fly  paper,  in  191 5  reached 


LETTER  OF  CREDIT  AS  A  TRADE  WEAPON       243 

an  understanding  with  practically  all  of  their  foreign 
agents  that  they  would  supply  commercial  letters  of  credit 
on  New  York  banks,  agreeing  in  turn  with  their  customers 
to  pay  the  bankers'  commission  for  issuing  the  credits. 
This  company  has  also  given  its  agents  the  alternative  of 
opening,  instead  of  sight  credits,  acceptance  credits  of  30, 
60,  90  days,  or  even  longer  periods,  the  rate  of  discount 
being  diminished  accordingly.  It  regards  the  slight  ex- 
pense of  paying  the  bankers'  commission  for  the  accommo- 
dation as  being  more  than  offset  by  the  advantages  to  be 
gained  from  the  arrangement. 

Other  Methods  More  Costly  in  the  Long  Run 

It  runs  counter  to  business  experience  to  expect  that 
the  concentration  of  our  export  business  in  the  hands  of  a 
comparatively  few  powerful  houses  which  are  able  to 
finance  their  entire  volume  of  business  on  their  own  ac- 
count would  lessen  the  eventual  cost  to  the  rest  of  the 
world  of  dealing  with  us.  These  merchants  would  have  to 
calculate  in  their  cost  the  hazard  of  accepting  a  mercantile 
instead  of  a  banking  credit  risk.  In  addition  the  ability 
to  finance  foreign  shipments  is  a  valuable  facility  for 
which  foreign  buyers  would  have  to  pay.  Like  a  tax  which 
is  ostensibly  paid  by  the  importer  but  which  is  actually 
passed  on  to  the  retailer  and  eventually  to  the  consumer, 
the  cost  of  doing  business  is  reflected  in  the  price.  There 
is  but  one  way  to  bring  our  quotations  to  the  lowest  com 
petitive  levels,  and  that  is  to  bring  every  element  which 
enters  into  the  quoted  price  into  its  most  economical  form. 
Taking  into  consideration  all  the  factors  involved,  includ- 
ing the  risks,  there  is  no  method  by  which  American 
forcing  commerce  can  be  financed  which  will  impose  so 
light  a  burden  upon  the  commerce  as  the  commercial  letter 
of  credit  plan. 


244  AMERICAN  COMMERCIAL  CREDITS 

Request  for  a  Commercial  Letter  of  Credit  Not  a  Re- 
flection on  the  Buyer 

The  history  of  business  is  replete  with  instances  in 
which  economical  and  convenient  methods  of  doing  busi- 
ness had  to  be  waived  in  favor  of  more  burdensome  ones 
as  a  concession  to  prejudices  of  the  buyers.  Is  it  likely 
that  the  seller's  request  for  a  commercial  letter  of  credit 
may  be  regarded  by  the  buyer  as  a  reflection  on  his  credit 
standing?  As  a  matter  of  fact,  it  is  quite  the  reverse.  The 
buyer  and  seller,  in  dividing  the  burden  of  foreign  trade, 
must  apportion  to  each  other  the  tasks  which  each  is  best 
equipped  to  perform.  If  the  seller  is  not  strong  enough 
to  finance  the  shipment  and  the  buyer  is,  then  the  request 
that  the  buyer  should  use  his  credit  standing  to  finance  a 
shipment  by  furnishing  the  seller  a  commercial  letter  of 
credit  compliments  the  buyer  by  admitting  his  superior 
standing.  If  the  seller  is  strong  enough  to  finance  the 
shipment  and  still  seeks  the  credit,  it  is  because  he  wants 
the  principle  of  insurance  to  apply  to  his  credit  risk,  just 
as  it  does  to  his  fire  risks  and  his  marine  risks. 

There  is  no  more  reason  for  the  buyer  to  resent  the 
efforts  of  the  seller  to  insure  himself  against  unforeseen 
financial  reverses  than  for  the  master  of  a  ship  to  resent 
the  action  of  the  cargo-owner  in  seeking  insurance  against 
the  unforeseen  perils  of  the  sea.  It  is  assumed  that  the 
master  has  properly  manned,  equipped,  provisioned,  and 
fitted  out  his  vessel,  and  that  she  is  seaworthy  and  capable 
of  performing  her  intended  voyage.  So  it  is  also  assumed 
that  the  buyer  is  conducting  his  business  with  ordinary 
prudence  and  has  surrounded  it  with  the  customary  safe- 
guards which  careful  business  men  employ.  In  either  case, 
unless  these  precautions  are  taken,  no  man  is  justified  in 
entering  into  a  business  relationship  with  him. 

The  best  evidence  that  the  adoption  of  the  commercial 


LETTER  OF  CREDIT  AS  A  TRADE  WEAPON      245 

letter  of  credit  method  of  financing  is  not  a  reflection  on 
the  buyer's  credit  standing,  is  that  the  instrument  is  used 
in  the  world  financial  centers  where  merchants  are  strong- 
est. No  nation  has  employed  it  as  extensively  as  the 
British,  and  its  most  persistent  use  in  this  country  has 
been  by  the  strongest  and  best  reputed  American  mer- 
chants in  financing  their  importations  of  merchandise  to 
this  country.  There  is  no  occasion  on  the  part  of  any 
merchant  to  feel  that  the  resort  to  the  commercial  letter 
of  credit  method  of  financing  his  purchases  is  a  reflection 
on  his  credit  standing. 

The  Prospect  for  the  Future 

One  of  the  national  banks  which  has  taken  a  leading 
part  in  our  transition  from  a  provincial  to  an  international 
banking  viewpoint  said,  in  a  pamphlet  printed  shortly  after 
the  passage  of  the  Federal  Reserve  Act,  that  there  was 
little  chance  that  this  country  would  ever  come  into  com- 
petition with  the  established  international  bankers  of  Lon- 
don, Paris,  and  Berlin.  Yet  on  April  i,  1920,  according 
to  a  survey  made  by  the  American  Acceptance  Council,  the 
total  volume  of  American  bank  and  bankers'  acceptances 
outstanding  was  $799,001,237.41.  At  the  end  of  the  next 
year  this  amount  had  shrunk  to  $664,092,113.39.  This 
shrinkage  was  in  some  part  accounted  for  by  the  fall  in 
commodity  prices,  which  made  it  possible  to  finance  a  much 
larger  turnover  of  goods  with  the  same  or  less  amount  of 
credit.  Unquestionably  our  acceptance  business  has 
suffered  heavily  in  the  last  year  from  the  handicaps  which 
have  arisen,  not  from  any  defect  in  the  principle  of  opera- 
tion, but  from  the  friction  and  disputes  which  have  re- 
sulted from  the  haphazard  development  of  the  commercial 
credit  instruments  out  of  which  most  of  our  acceptances 
arise.     It  is  fair  to  say,  however,  that  while  the  foreign 


246  AMERICAN  COMMERCIAL  CREDITS 

financial  centers  shared  with  us  fully  the  unpleasant 
experiences  of  1920,  it  is  the  American  banker  and  the 
American  merchant  alone  who  have  taken  effective  steps 
to  eliminate  the  possibility  of  their  future  recurrence. 

Mr.  Hartley  Withers,  the  English  economist,  in  his 
book  on  "The  Meaning  of  Money,"  published  in  1909, 
credited  Americans  with  the  cherished  ambition  to  see  New 
York  established  some  day  as  the  monetary  center  of  the 
universe,  and  with  natural  resources  and  population 
sufficient  to  achieve  their  wish,  if  they  could  learn  the 
necessary  lessons  and  develop  the  necessary  character. 
"And,"  he  said,  "an  American  can  learn  anything,  if  he 
thinks  it  worth  while." 

It  took  the  commercial  letter  of  credit  some  centuries 
to  reach  us.  When  it  arrived,  it  was  a  crude  implement  on 
which  to  place  reliance,  either  as  shield  or  sword.  We 
have,  within  a  decade,  forged  it  into  a  formidable  weapon, 
uniquely  adapted  to  consolidating  the  position  which  we 
cannot  fairly  say  we  have  won,  but  rather  which  fate  has 
put  into  our  hands. 


CHAPTER  XVII 

NATURE  OF  RIGHTS  AND  OBLIGATIONS 

CREATED  BY  DOCUMENTARY  LETTERS 

OF  CREDIT* 

I.     Theories  as  to  Rights  Created  by  Letter 
OF  Credit 

To  a  business  man  nothing  is  simpler  than  the  nature 
of  the  obHgation  created  by  an  irrevocable  banker's  docu- 
mentary letter  of  credit.  The  seller  of  the  goods  believes 
that  if  he  has  such  an  instrument  he  has  the  direct  obliga- 
tion of  the  issuing  bank,  running  in  his  favor,  enforcible 
by  him  against  that  bank,  that  it  will  pay  his  drafts,  if 
drawn  in  compliance  with  the  terms  of  the  letter  of  credit. 
He  cannot  understand  how  there  can  be  any  difficulty  upon 
this  subject;  and  yet  to  courts  and  lawyers  numerous 
difficulties  present  themselves.  A  fundamental  difficulty 
is  that,  while  the  issuing  bank  gives  its  direct  undertaking 
to  the  beneficiary  of  the  credit,  it  receives  no  consideration 
from  him  therefor.  The  bank  issues  the  credit  to  the 
seller  at  the  request  of  the  buyer,  the  buyer  agreeing  with 
the  bank  to  pay  to  it  a  small  commission,  usually  i/8  to 
1/4  per  cent  of  drafts  negotiated  thereunder.  This  would, 
of  course,  be  a  sufficient  consideration  to  support  the  con- 
tract, if  it  passed  to  the  bank  from  the  beneficiary  of  the 
credit;  but  the  bank  actually  receives  no  consideration 
whatever  from  the  beneficiary. 


*This  and  the  following  chapter  were  written  by   Carl  A.   Mead,  and  ap- 
peared in  substance  in  22  Columbia  Law  Rev.,  p.   297. 

247 


248  AMERICAN  COMMERCIAL  CREDITS 

Another  source  of  confusion  is  the  fact  that  many  of 
the  ear  her  decisions  of  the  courts  relate  to  the  old  form 
of  letter  of  credit,  which  was  a  mere  request  to  a  third 
person  to  advance  credit  to  the  beneficiary,  and  not  the 
direct  promise  of  the  issuing  bank  in  his  favor.  The 
courts  have  sometimes  failed  to  discriminate  between 
different  forms  of  letters  of  credit;  and  most  of  the 
earlier  decisions  have  no  bearing  whatever  upon  the  rights 
and  liabilities  of  parties  to  a  modern  documentary  letter 
of  credit.  This  situation  has  resulted  in  various  theories 
in  regard  to  the  nature  of  the  contract  rights  created  by  a 
letter  of  credit. 

1.  Offer  and  acceptance 

It  is  sometimes  said  that  a  letter  of  credit  is  a  mere 
offer  of  the  issuing  bank.  This  theory,  however,  does 
not  meet  the  situation,  for  it  is  usually  the  intention  of 
the  parties  that  the  credit  shall  be  irrevocable  from  the 
time  when  it  is  issued;  whereas,  if  it  constitutes  a  mere 
offer,  it  is,  of  course,  revocable  by  the  issuing  bank  until 
the  offer  has  been  accepted  by  the  beneficiary  by  some 
action  in  reliance  thereon,  such  as  procuring  and  shipping 
the  goods. 

2.  Guaranty  by  issuing  bank 

Another  theory  is  that  the  issuing  bank  is  a  mere 
guarantor  of  the  obligation  of  the  purchaser  to  pay  for 
the  goods.  This  theory  again  does  not  conform  to  the 
facts,  since,  by  the  terms  of  the  letter  of  credit,  the 
bank  is  not,  like  a  guarantor,  secondarily  liable,  but  un- 
dertakes a  direct  primary  obligation  in  favor  of  the 
beneficiary  of  the  credit. 

J.     Liability  of  bank  by  estoppel 

Another  attempt  to  solve  the  difficulty  is  based  upon  the 
theory  of  estoppel.  In  the  quaint  language  of  Lord  Coke 
(3  Co.  Litt.,  p.  342)  estoppel  is  referred  to  as  follows: 


RIGHTS  AND  OBLIGATIONS  249 

A  man's  own  act  or  acceptance  stops  or  closes  up  his  mouth 
to  allege  or  plead  the  truth. 

Estoppel  involves  an  admission,  statement,  or  act 
inconsistent  with  a  claim  afterwards  asserted,  also  an 
action  by  another  party  in  reliance  thereon  and  injury  to 
the  other  party.  The  representation  must  be  as  to  past 
or  existing  facts  and  not  a  promise  as  to  the  future,  which, 
if  binding  at  all,  is  binding  as  a  contract. 

It  is  said  that  the  bank,  by  issuing  the  letter  of  credit, 
x'epresents  to  the  beneficiary  and  to  holders  of  drafts 
drawn  thereunder  that  it  has  received  from  the  purchaser 
of  the  goods  sufficient  funds  to  meet  the  drafts ;  and  that, 
if  this  representation  is  not  true,  the  bank  should  be  held 
liable  to  anyone  who  has  acted  in  reliance  thereon  upon  the 
theory  of  estoppel. 

There  are  various  objections  to  this  theory.  First 
of  all,  it  is  very  seldom  that  the  issuing  bank  has  re- 
ceived from  the  buyer  of  the  goods  any  funds  in  advance 
of  the  issuance  of  the  credit.  The  purchaser  usually  goes 
for  such  an  instrument  to  his  own  bank,  which  is  familiar 
with  his  credit  standing.  The  bank  well  knows  how  much 
it  is  willing  to  advance  on  his  unsecured  obligation;  but 
the  advances  may  not  be  wholly  unsecured,  since  the  bank 
usually  holds  documents  representing  the  title  to  the  goods 
purchased  as  security  for  its  advances. 

Furthermore,  even  if  the  issuing  of  the  letter  of  credit 
did  amount  to  a  representation  that  the  bank  had  funds 
of  the  purchaser  of  the  goods  in  its  possession  sufficient 
to  meet  the  drafts,  that  fact  alone  would  not  be  sufficient 
to  make  the  bank  liable  upon  the  principle  of  estoppel, 
lojjrder  to  make  a  person  liable  by  estoppel,  he  must  have 
made  a  false  representation  a*^  to  an  existing  fact.  The 
representation  in  this  case  might  be  strictly  true  that  the 


2  so  AMERICAN  COMMERCIAL  CREDITS 

purchaser  of  the  goods  had,  at  the  time  when  the  credit 
was  issued,  deposited  funds  with  the  issuing  bank  sufficient 
to  meet  the  drafts.  The  letter  of  credit,  however,  involves 
the  further  representation  that  these  funds  will  be  held  by 
the  bank  and  utilized  for  payment  of  the  drafts.  This 
representation  is  not  as  to  an  existing  fact,  but  is  promis- 
sory in  its  nature,  and  consequently  cannot  be  the  basis 
of  any  liability  by  estoppel. 

4.  Equitable  assignment  of  funds  on  deposit 
Attempts  have  been  made  to  work  out  the  liability 

of  the  issuing  bank  upon  its  letter  of  credit  on  the  theory 
that  it  has  thereby  made  an  equitable  assignment  to  the 
beneficiary  of  the  credit  of  funds  belonging  to  the  pur- 
chaser of  the  goods  on  deposit  with  it.  The  same  objec- 
tions exist  to  this  theory  as  to  the  last,  namely,  that  usually 
the  bank  has  no  such  funds  on  deposit,  and,  furthermore, 
that  that  is  not  the  intention  of  the  parties;  and  it  was 
long  ago  so  decided  by  the  British  House  of  Lords. 

Morgan  v.  Lariviere,  L.R.  7  H.  L.  423. 

5.  Contract  by  issuing  bank  with  buyer  for  benefit 
of  seller 

Efforts  have  been  made  to  solve  the  difficulty  by 
applying  the  principles  of  Lawrence  v.  Fox  (20  N.  Y. 
268),  under  which  a  contract  made  by  one  person  with 
another  for  the  benefit  of  a  third  may  be  enforced  directly 
by  the  third  person.  This  theory  also  does  not  fit  the  facts 
of  the  case,  since  the  letter  of  credit  is  not  a  contract  be- 
tween the  bank  and  the  buyer,  from  whom  it  receives  its 
commission,  but  between  the  bank  and  the  seller. 

6.  Direct  contract  by  issuing  bank  to  beneficiary 
of  credit 

The  most  recent  theory  in  support  of  this  form  of 


RIGHTS  AND  OBLIGATIONS  251 

obligation  is  that  it  constitutes  a  mere  simple  contractual 
obligation  from  the  issuing  bank  to  the  beneficiary,  sup- 
ported by  a  consideration  in  the  form  of  the  commission 
paid  to  the  issuing  bank  by  the  purchaser  of  the  goods. 
This  theory  solves  all  of  the  difficulties  involved,  carries 
out  perfectly  the  intention  of  all  the  parties  to  the  trans- 
action, and  violates  no  recognized  principles  of  law.  On 
this  theory,  a  so-called  irrevocable  letter  of  credit  is 
irrevocable  in  law  from  the  time  it  is  issued,  whether  or 
not  the  beneficiary  has  changed  his  position  in  reliance 
thereon.  No  rule  of  law  or  principle  of  public  policy  is 
violated.  It  might  be  argued  that  the  instrument  should 
be  supported,  even  though  there  were  no  consideration 
moving  to  the  issuing  bank,  on  the  theory  that  it  is  a 
specialty,  recognized  by  the  law  merchant.  It  is  not 
necessary  to  go  so  far  as  this,  however,  since  the  issuing 
bank  does  receive  a  valuable  consideration  for  its  promise, 
in  the  form  of  a  commission  from  the  buyer  of  the  goods ; 
and  it  is  now  well  settled  law  in  this  country  that  a  contract 
may  be  suported  by  a  consideration  moving  to  the  promisor 
from  another  than  the  promisee. 


I   Williston,  Cont.    (1920),   Sees.    114,  354. 

Farley  v.  Cleveland,  4  Cow.  432,  439. 

Rector  v.  Teed,  120  N.  Y.  583;  24  N.  E.   1041. 

De  Cicco  V.  Schweizer,  221  N.  Y.  431;   117  N.  E.  807. 

Hamilton  v.  Hamilton,  127  App.  Div.   (N.  Y.)   871 

Cabot  V.  Haskins,  20  Mass.  83,  91. 

Palmer  Savings  Bank  v.  Insurance  Co.,  166  Mass.  189,  196; 

44  N.  E.  211. 
Crosier  v.  Crosier,  215  Mass.  535,  537;   102  N.  E.  901. 
Bell'v.  Sappington,  in  Ga.  391,  393;  36  S.  E.  78. 
Williamson  v.   Yager,  91    Ky.  282,  286;    15   S.   W.   600. 
Owenby  v.  Georgia  Baptist  Assembly,  137  Ga.  698,  701 ;  74 

S.  E.  56. 
Van  Eman  v.  Stanchfield,  10  Minn.  255,  261. 


252  AMERICAN  COMMERCIAL  CREDITS 

21  Columbia  Law  Rev.  176   (1921). 
34  Harvard  Law  Rev.  533    (1921). 

This  principle  of  liability  to  the  beneficiary  named  in 
the  credit  and  to  persons  negotiating  his  drafts,  upon 
the  direct  promise  of  the  issuing  bank  was  discussed  and 
approved  as  long  ago  as  1867. 

Re  Agra  and  Mastermans  Bank,  ex  parte  Asiatic  Banking 

Corporation,  36  L.  J.  Ch.  222. 
Union  Bank  of  Canada  v.  Cole,  47  L.  J.  C.  P.  100. 

It  has  also  been  adopted  and  applied  in  several  recent 
cases ;  and  it  can  now^  be  regarded  as  well-settled  law. 

Sovereign    Bank    v.    Bellhouse,    Quebec    Official    Reports, 

23  K.  B.  413. 
Gelpcke  v.  Quentell,  74  N.  Y.  599. 

American  Steel  Co.  v.  Irving  National  Bank,  266  Fed.  41. 
Frey  v.  National  City  Bank,   193  App.  Div.    (N.  Y.)   849. 
Doelger  v.  Battery  Park  National  Bank,  Reported  in  New 

York   Journal    of    Commerce   and    Commercial    Bulletin, 

April  20,  1921. 

In  Sovereign  Bank  v.  Bellhouse,  the  court  held : 

Undoubtedly  a  person  can  induce  a  Bank  to  give  him  a  letter 
of  credit  and  may,  by  a  subsequent  line  of  conduct,  justify  the 
bank  in  cancelling  it,  but  it  is  not  the  same  when  the  customer 
induces  the  bank  to  give  a  letter  of  credit  to  a  third  person.  In 
that  case  the  customer  cannot  compel  the  bank  to  cancel  the 
letter,  because  there  is  no  contract  between  the  customer  and  the 
bank  but  only  one  between  the  bank  and  the  third  party. 

Gelpcke  v.  Quentell  is  one  of  the  earlier  cases  in 
which  the  principle  was  recognized.  The  purchaser  of 
the  goods  sought  to  revoke  a  letter  of  credit  issued  by  the 
bank.     The  bank,  however,  declined  to  dishonor  drafts 


RIGHTS  AND  OBLIGATIONS  253 

drawn  under  its  letter  of  credit  and,  after  paying  them, 
sought  to  recover  their  amount  from  the  purchaser,  for 
whose  account  the  credit  had  been  opened.  The  court  held 
that  the  bank  was  entitled  to  recover,  saying : 

The  defendant  could  not,  by  his  revocation  of  the  credit, 
escape  liability  to  indemnify  the  plaintiffs  against  responsibilities 
which  they  had  incurred  or  require  them  to  violate  contracts 
which  they  had  made  in  pursuance  of  a  letter  of  credit  before 
notice  of  the  revocation  ...  By  the  terms  of  the  plaintiff's 
agreement,  which  they  made  on  the  faith  of  the  defendant's  im- 
plied promise  to  indemnify,  they  were  bound  to  accept  the  drafts ; 
and  they  were  not  required  to  decline  to  accept  after  receipt  of 
notice  of  revocation  and  take  the  chances  of  a  defense  existing,  of 
which  they  knew  nothing,  but  were  entitled  to  perform  their  con- 
tract, and  look  to  the  defendant  for  indemnity. 

In  the  recent  case  of  American  Steel  Company  v. 
Irving  National  Bank  a  similar  question  arose,  and  the 
Circuit  Court  of  Appeals  for  the  Second  Circuit  said : 

The  law  is  that  a  bank  issuing  a  letter  of  credit  like  the  one 
here  involved  cannot  justify  its  refusal  to  honor  its  obligations  by 
reason  of  the  contract  relations  existing  between  the  bank  and 
its  depositor.  .  .  There  is  but  one  vital  question  involved  in 
this  case.  It  is  whether  the  letter  of  credit  already  set  forth 
herein  is  a  complete  and  independent  contract  between  the  plain- 
tiff and  the  defendant.  This  court  is  satisfied  that  it  is,  and  that 
by  it  the  defendant  gave  authority  to  the  plaintiff  to  draw  upon 
it  up  to  the  sum  of  $43,250,  and  impliedly  promised  to  pay  drafts 
so  drawn  when  accompanied  by  certain  specific  documents,  to 
wit,  the  invoices  and  bills  of  lading,  providing  the  drafts  were 
drawn  and  presented  prior  to  the  expiration  of  the  credit  on 
June  13,  1918. 

The  defendant,  in  effect,  seeks  to  read  into  the  contract  a 
provision  that  the  plaintiff's  rights  under  the  letter  of  credit 
should  be  subject  to  the  superior  right  of  the  MacDonnell  Chow 
Corporation  to  modify  the  contract  which  the  bank  had  made 
with  the  plaintiff.    We  do  not  so  understand  the  law. 


2  54  AMERICAN  COMMERCIAL  CREDITS 

In  Frey  v.  The  National  City  Bank,  the  defendant 
bank  issued,  for  account  of  the  plaintiff,  in  favor  of 
Sherburne  Company,  which  was  also  joined  as  a  defendant, 
a  letter  of  credit  available  by  drafts  with  documents, 
representing  a  shipment  of  sugar  from  Java.  The  contract 
of  sale  provided  that,  if  the  steamer  carrying  the  goods 
did  not  clear  within  a  specified  time,  the  buyers  might 
cancel  the  remaining  portion  of  the  contract;  but  no  such 
provision  was  incorporated  in  the  letter  of  credit.  The 
plaintiff,  however,  gave  notice  of  cancellation  of  the 
contract  and  brought  this  action  to  enjoin  the  defendant 
Sherburne  Company  from  drawing  drafts  under  the  letter 
of  credit  and  the  defendant  bank  from  paying  drafts  so 
drawn.  An  order  denying  the  plaintiff's  motion  for  an 
injunction,  pending  the  action,  was  aifirmed  by  the 
Appellate  Division. 

In  the  Doelger  case  it  was  held  at  trial  term  that  an 
irrevocable  letter  of  credit,  when  its  conditions  had 
been  complied  with,  was  a  contract  by  the  bank  to  accept 
and  pay  drafts  presented  at  any  time  before  the  credit 
expired;  and  the  court  expressed  the  opinion  that  if,  even 
before  the  seller  had  bought  any  goods  or  changed  his 
position  in  any  way  on  the  faith  of  the  letter,  the  bank 
should  repudiate  its  contract  and  announce  that  it  would 
accept  no  drafts  drawn  thereunder,  the  seller  would 
thereby  be  relieved  of  the  necessity  of  performing  and 
could  recover  from  the  bank  the  profit  of  which  he  had 
been  deprived  by  the  bank's  wrongful  act. 

II.    Assignability  of  Letter  of  Credit 

Upon  the  question  whether  a  documentary  letter  of 
credit  is  negotiable  or  assignable  the  earlier  decisions, 
relating  to  the  older  forms  of  letters  of  credit,  have  little 


RIGHTS  AND  OBLIGATIONS  255 

bearing.  As  has  already  been  pointed  out,  the  docu- 
mentary letter  of  credit  is  addressed  to  the  beneficiary 
by  name,  authorizing  him  to  draw  drafts  thereunder. 
Thus,  its  form  clearly  indicates  that  it  is  not  intended  to 
be  either  negotiable  or  assignable.  It  is  like  a  power  of 
attorney,  authorizing  the  named  person  to  draw  drafts; 
and  the  attorney  has  no  power  of  substitution,  unless  such 
power  is  expressly  conveyed  by  the  instrument  itself.  A 
letter  of  credit  could,  no  doubt,  authorize  either  the 
beneficiary,  or  any  person  designated  by  him  in  writing, 
to  draw  drafts  under  the  letter  of  credit ;  but  if  it  does  not 
do  so  expressly,  no  such  power  exists.  In  the  case  of 
documentary  credits,  used  in  connection  with  a  contract 
for  the  sale  of  goods,  it  is  obvious  that  the  parties  do  not 
contemplate  the  assignment  of  the  letter  of  credit.  The 
buyer  and  seller  have  made  their  contract  of  sale  in  mutual 
reliance  upon  each  other.  They  may  have  known  each 
other  from  a  long  course  of  dealing,  or  this  may  have  been 
their  first  transaction;  but,  in  any  event,  the  buyer  relies 
upon  the  seller  to  carry  out  his  contract  of  sale.  In  fact, 
the  buyer  has  placed  peculiar  confidence  in  the  seller,  be- 
cause, in  reliance  upon  his  promise  to  ship  goods  of  the 
kind  and  quality  agreed  upon,  he  has  directed  his  bank 
to  make  payment  against  the  documents.  The  relation, 
accordingly,  is  one  of  peculiar  trust  and  confidence;  and 
the  banks  constantly  seek  to  impress  upon  their  customers 
the  danger  of  opening  an  irrevocable  credit  in  favor  of  an 
unknown  party.  This  being  the  case,  it  must  be  presumed 
that  the  buyer  did  not  intend  that  any  assignee  of  the  letter 
of  credit  should  be  authorized  to  draw  drafts  thereunder, 
but  that  only  the  person  with  whom  he  contracted  for  the 
goods  should  have  the  authority.  However,  the  drafts, 
if  they  are  once  drawn  under  the  letter  of  credit,  are 
negotiable. 


2S6  AMERICAN  COMMERCIAL  CREDITS 

Frequently  an  effort  is  made  to  assign  an  irrevocable 
documentary  letter  of  credit,  running  to  the  seller  of 
goods,  to  his  bank  as  collateral  security  for  a  correspond- 
ing irrevocable  letter  to  be  issued  by  that  bank  to  a  person 
from  whom  the  beneficiary  of  the  original  credit  seeks 
to  purchase  goods  to  be  shipped  in  fulfilment  of  his 
contract  of  sale.  It  is  recognized,  however,  that  such 
security  is  very  uncertain;  and  it  is  not  the  practice  of 
the  banks  to  place  much  reliance  upon  it.  If  this  security 
is  taken,  the  bank  usually  requires  the  original  letter  of 
credit  to  be  deposited  with  it,  together  with  blank  drafts, 
bearing  the  signature  of  the  beneficiary  of  the  credit, 
which  can  be  filled  in  as  to  amount  and  date  when  the 
required  documents  are  available. 


CHAPTER  XVIII 

PERFORMANCE  UNDER  DOCUMENTARY 
LETTERS  OF  CREDIT 

I.    The  Bank  Must  Comply  Strictly  with 
THE  Terms  of  the  Letter  of  Credit 

Both  the  negotiating  and  the  issuing  bank  must  exer- 
cise the  utmost  care  in  assuring  themselves  that  the  docu- 
ments against  which  the  draft  is  negotiated  or  paid,  as  the 
case  may  be,  comply  in  all  respects  with  the  terms  of  the 
letter  of  credit.  If  they  do  not,  the  negotiating  bank 
cannot  recover  from  the  issuing  bank  and  the  issuing 
bank  cannot  recover  from  the  buyer  of  the  goods.  This 
question  has  come  up  in  numerous  cases;  and  it  is 
uniformly  held  that  the  bank  cannot  recover  if  the  terms 
of  the  letter  of  credit  have  not  been  strictly  complied 
with. 


The  Brazilian  and    Portuguese   Bank   v.   The   British  and 

American  Exchange  Banking  Corporation,  i8  Law  Times 

823. 
The   Chartered   Bank  of   India,  etc.,  v.   McFayden  &   Co., 

64  Law  Jour.,  Q.  B.  367. 
Bank  of  Montreal   v.   Recknagel,   109   N.  Y.  482,  490;    17 

N.  E.  217. 
Lamborn  v.  Lake  Shore  Banking  &  Trust  Co.,   196  App. 

Div.  (N.  Y.)  504,  506;  aff'd  231  N.  Y.  616. 
International  Banking  Corporation  v.  Irving  National  Bank, 

274  Fed.  122,  125. 
Diamond   Alkali   Export   Corporation  v.   Bourgeois,   K.  B. 

Div.,  July  I,  1921,  McCardie,  J.,  126  Law  Times  Rep.  379. 

17  257 


2  58  AMERICAN  COMMERCIAL  CREDITS 

In  Brazilian  Bank  v.  British  Banking  Corporation,  the 
letter  of  credit  called  for  shipment  from  Rio  de  Janeiro 
to  New  York,  Philadelphia,  or  Baltimore,  and  provided 
that  all  the  bills  of  lading,  except  one  to  be  forwarded  by 
the  vessel  to  New  York  and  one  to  be  retained  by  the 
captain,  should  be  forwarded  direct  to  the  defendants  in 
London.  The  bills  of  lading,  when  issued,  showed  ship- 
ment from  Rio  "bound  for  St.  Thomas  for  orders,"  and 
one  of  them  w^s  retained  by  the  shipper.  As  the  require- 
ments of  the  letter  of  credit  had  not  been  complied  with, 
it  was  held  that  a  bank  which  had  negotiated  the  drafts 
could  not  recover  from  the  issuing  bank. 

In  Chartered  Bank  of  India  v.  McFayden  and  Com- 
pany, the  letter  of  credit  authorized  drafts  to  be  drawn 
thereunder  "against  produce  bought  and  paid  for."  The 
beneficiary  drew  the  drafts  without  purchasing  the  com- 
modities; and  it  was  held  that  the  plaintiff,  having  dis- 
counted the  drafts,  in  reliance  on  the  good  faith  of  the 
drawers,  must  take  the  consequences  of  any  breach  of  good 
faith  on  their  part,  and  could  not  recover  from  the 
defendant,  which  had  issued  the  credit. 

In  Bank  of  Montreal  v.  Recknagel,  the  letter  of  credit 
called  for  a  "full  set  bills  of  lading  of  2500  bales  Manila 
hemp."  The  bills  of  lading  actually  called  for  "bales  of 
merchandise,  weight  and  contents  unknown."  It  turned 
out  that  the  shipment  was  not  hemp,  as  required  by  the 
contract.  The  issuing  bank,  having  paid  the  drafts, 
brought  this  action  against  the  purchaser  of  the  goods; 
and  it  was  held  that  it  was  not  entitled  to  recover.  Gray, 
J.,  said: 

The  credit  was  authorized  upon  certain  conditions,  prescribed 
by  the  parties  to  be  ultimately  bound;  which  they  not  only 
had  the  right  to  make,  but  which  were  assented  to  by  the 
plaintiff. 


PERFORMANCE  259 

In  Lamborn  v.  Lake  Shore  Banking  and  Trust  Com- 
pany, the  letter  of  credit  called  for  "bills  of  lading  for 
550  bags  Java  white  granulated  sugar."  The  bills  of 
lading  actually  described  the  sugar  as  "550  bags  of  Java 
white  sugar."  A  motion  to  vacate  a  warrant  of  attach- 
ment, which  had  been  issued  in  an  action,  brought  by  the 
beneficiary  against  the  issuer  of  the  letter  of  credit,  on  the 
ground  that  the  complaint  did  not  state  a  cause  of  action, 
was  granted,  although  the  plaintiff  presented  affidavits  in 
support  of  the  warrant  tending  to  show  that  Java  white 
granulated  sugar  was  not  only  known  in  the  market  as 
Java  white  sugar,  but  was  the  only  white  sugar  shipped 
from  Java.    Upon  this  subject  the  court  said : 

It  is  clear  that  the  defendant  is  not  under  obligation  to  investi- 
gate and  ascertain  whether  the  contract  between  the  vendor  and 
vendee  has  been  fulfilled.  The  only  contract  which  the  defendant 
has  made  was  to  honor  the  vendor's  drafts  as  against  the  bill  of 
lading  for  "Java  white  granulated  sugar." 

In  International  Banking  Corporation  v.  Irving 
National  Bank,  the  letter  of  credit  authorized  drafts  to 
be  drawn  "against  complete  negotiable  set  of  shipping 
documents  covering  500  pieces  Fuji  silk  .  .  .  total  width 
of  stripes  not  more  than  50%  of  the  material  width."  The 
documents  required  were  negotiable  bills  of  lading,  in- 
surance certificates,  consular  invoice,  and  commercial 
invoice.  There  was  no  statement  in  any  of  the  documents 
presented  that  the  stripes  were  not  more  than  50  per  cent 
of  the  material  width.  For  this  reason  the  defendant,  the 
issuing  bank,  refused  to  pay  the  drafts  drawn  under  the 
letter  of  credit ;  and  its  action  was  sustained  by  the  court. 

In  that  case  the  issuing  bank,  perhaps  by  inadvertence, 
had  incorporated  in  its  letter  of  credit  certain  of  the  terms 
of  the  underlying  contract  of  sale.     As  intimated  in  the 


26o  AMERICAN  COMMERCIAL  CREDITS 

opinion  of  the  court,  this  is  Hkely  to  lead  to  complica- 
tions. The  letter  of  credit  should  provide  simply  for  pay- 
ment against  standard  documents,  in  a  form  with  which 
bank  clerks  are  familiar  and  which  they  clearly  under- 
stand. 

In  the  very  recent  case  of  Diamond  Alkali  Export 
Corporation  v.  Bourgeois,  a  sales  contract  was  under  con- 
sideration and  not  a  letter  of  credit.  However,  the  case 
is  important,  as  it  defines  certain  terms,  which  are  con- 
stantly used  in  letters  of  credit.  The  contract  provided 
for  payment  by  cash  against  documents,  including  bills 
of  lading  and  insurance  policies,  under  confirmed  bankers* 
credit  at  London,  price  c.i.f.  Gottenburg.  The  bill  of 
lading  was  not  in  the  old  familiar  form,  acknowledging 
that  the  goods  had  been  "received  on  board,"  but  read 
"received  in  apparent  good  order  and  condition  ...  to 
be  transported  by  the  steamship  'Anglia,'  now  lying  in  the 
port  of  Philadelphia  ...  or,  failing  shipment  by  said 
steamer,  in  and  upon  a  following  steamer."  No  policies 
of  insurance  were  tendered,  but  only  a  certificate  that  the 
goods  were  insured  under  a  policy  which  was  not  tendered. 
The  buyers  having  rejected  the  documents,  the  sellers 
brought  this  action  for  damages.  Justice  McCardie,  in 
holding  that  the  document  tendered  was  not  a  bill  of 
lading,  such  as  had  been  contracted  for,  said: 

From  the  earliest  times  a  bill  of  lading  was  a  document  which 
acknowledged  actual  shipment  on  board  a  particular  ship  .  .  . 
Apart  from  any  authority  to  the  contrary,  it  seems  to  me  that  I 
must  hold  that  the  document  here  is  not  a  bill  of  lading  within 
the  c.i.f.  contract  before  me.  It  does  not  acknowledge  the  goods 
to  be  on  board  a  specific  ship,  nor  does  it  acknowledge  a  shipment 
on  board  at  all.  It  leaves  it  uncertain  as  to  whether  the  goods 
will  come  by  the  "Anglia"  or  some  following  ship.  The  word 
"following"  is  loose  and  ambiguous  in  itself  .  .  .  The  document 
seems  to  me  to  be  (in  substance)  a  mere  receipt  for  goods  which 


PERFORMANCE  261 

at   some   future  time  and  by  some   uncertain   vessel   are   to   be 
shipped. 

He  further  held  that  a  certificate  of  insurance  was 
not  a  good  tender  in  England  under  an  ordinary  c.i.f. 
contract. 

It  has  been  held  in  a  case  decided  at  New  York  County 
Trial  Term  in  March,  1921,  that,  under  a  letter  of  credit 
calling  for  "shipment  within  October  15,  1920,"  such  a 
"received  for  shipment"  bill  of  lading  is  not  evidence  of 
shipment  within  the  time  limited,  where  the  vessel  was 
not,  at  the  time  when  the  bill  of  lading  was  issued,  in  the 
Port  of  New  York. 

Viator  v.  The  National  City  Bank  of  New  York   (not  yet 
reported). 

This  was  an  action  by  the  seller  of  the  goods  against 
the  issuing  bank.  The  plaintiflf  contended  that,  under  a 
custom  claimed  to  prevail  in  the  Port  of  New  York, 
delivery  of  the  goods  to  the  carrier  constituted  shipment, 
even  though  they  were  not  placed  on  board.  This  question 
was  submitted  to  the  jury,  which,  by  its  verdict  for  the  de- 
fendant, found  that  no  such  custom  existed.  The  judg- 
ment has  been  reversed  on  appeal  because  of  error  in  the 
exclusion  of  evidence  and  the  case  sent  back  for  a  new 
trial. 

As  a  matter  of  practice,  the  issuing  bank  should  not 
call  in  its  letter  of  credit  for  a  bill  of  lading  describing 
the  goods  by  any  technical  terminology.  The  bill  of  lading 
is  issued  by  the  agents  of  the  carrier,  who  do  not  know 
and  are  not  interested  in  the  contents  of  the  packages 
delivered  to  them  for  shipment.  A  careful  description 
of  the  goods  should  be  contained  in  the  invoice  which  is 
prepared  by  the  seller,  who  knows  what  goods  he  has 


262  AMERICAN  COMMERICAL  CREDITS 

shipped.  If  he  deHberately  puts  a  false  description  of 
his  goods  in  his  invoice,  it  is  likely  that  he  will  be  held, 
under  the  law  of  any  jurisdiction,  to  have  committed  the 
crime  of  obtaining  money  under  false  pretenses.  Con- 
sequently the  letter  of  credit  should  require  that  the 
drafts  are  to  be  accompanied  by  "bills  of  lading  for 
merchandise,  invoice  to  read,"  followed  by  whatever 
technical  description  of  the  goods  may  be  desired. 

II.     The  Issuing  Bank  Is  Not  Responsible  for 
Genuineness  of  Documents  Tendered 

Suppose,  under  a  letter  of  credit  providing  that  pay- 
ment will  be  made  against  bill  of  lading,  invoice,  and 
insurance  certificate,  that  the  bank  pays  against  documents, 
apparently  complying  with  these  requirements,  but  which 
are  in  fact  forged  and  worthless,  who  must  bear  the  loss? 
It  is  held  that  the  bank  does  not  guarantee  the  genuineness 
of  the  documents,  and  that,  if  it  pays  in  good  faith  against 
documents  which  are  valid  on  their  face,  it  is  protected, 
even  though  the  documents  are  forged.  In  that  event,  the 
purchaser  must  look  for  his  remedy  to  the  guilty  parties. 

Woods  V.  Thiedemann,  i  H.  &  C.  478. 
Ulster  Bank  v.  Synnott,  Irish  Rep.  5  Equity  595. 
Guaranty  Trust  Co.  v.  Hannay,  87  L.  J.  K.  B.  1223,  1229. 
Springs  v.  Hanover  National  Bank,  209  N.  Y.  224;  103  N. 
E.  156. 

On  the  other  hand,  if  the  bank  pays  against  docu- 
ments which  it  knows  to  be  forged,  or  in  case  it  is  charge- 
able with  notice  of  that  fact,  the  bank  should  not  be 
protected  in  making  the  payment. 

Union  Bank  of  Canada  v.  Cole,  47  L.  J.  C.  P.  100. 


PERFORMANCE  263 

In  one  English  case  it  was  held  that  a  bank  was  not 
protected  when,  under  a  letter  of  credit  requiring,  among 
other  documents,  an  insurance  policy,  it  honored  drafts 
accompanied  by  a  policy  of  insurance  which  was  not  broad 
enough  to  cover  the  risk  of  certain  injuries  actually 
suffered  by  the  goods  when  on  board  ship. 

Borthwick  v.  Bank  of  New  Zealand,  17  T.  L.  R.  2. 

On  principle,  it  would  seem  that,  if  the  letter  of  credit 
required  insurance  against  all  risks,  a  bank  negotiating 
drafts  against  insurance  policies  which  did  not  cover  all 
risks  should  be  held  liable  for  loss  resulting.  If,  however, 
the  letter  of  credit  merely  calls  for  insurance  without 
specifying  what  form  of  insurance  is  required,  it  would 
seem  that  the  bank  should  be  protected,  if  the  seller  placed 
such  insurance  as  is  customary  at  that  time  and  place. 
The  question  as  to  what  is  such  customary  insurance  is  a 
question  of  fact;  and  in  the  case  last  cited,  evidence  was 
given  that  the  defendant  had  not  taken  the  customary 
insurance. 

III.     The  Bank  Is  Not  Responsible  for  the 
Character  or  Quality  of  the  Goods    . 

Under  a  letter  of  credit  authorizing  a  bank  to  pay 
against  specified  documents  covering  goods  of  a  character 
or  quality  named,  it  seems  to  be  settled  that  the  bank 
must  pay  if  the  specified  documents  describe  the  goods 
as  of  the  required  character  and  quality.  The  bank  is  not 
required  to  go  behind  the  documents  and  inspect  the  goods ; 
and  it  would  seem  that  it  has  no  right  to  do  so.  All  the 
parties  contemplate  that  payment  must  be  made  against  the 
documents ;  and  no  duty  can  be  imposed  upon  the  bank  to 
inspect  or  test  the  goods  in  the  absence  of  an  express  agree- 


264  AMERICAN  COMMERCIAL  CREDITS 

ment  to  that  effect.  No  doubt  the  parties  to  such  a  trans- 
action might  agree  that  the  bank  should  inspect  and  test 
the  goods  if  they  chose ;  but  a  bank  would  be  going  outside 
the  bounds  of  ordinary  banking  business  if  it  should 
undertake  to  do  this.  While  its  clerks  and  employees  are 
presumed  to  be  familiar  with  the  ordinary  documents 
tendered  under  a  documentary  letter  of  credit,  they  are 
usually  totally  unfamiliar  with  the  goods  which  are  the 
subject  of  the  sale;  and  an  inspection  of  the  goods  by  them 
would  be  of  no  benefit  to  anyone.  If  the  buyer  desires 
an  inspection  before  he  pays  for  the  goods,  that  can  be 
accomplished  by  a  provision  in  the  letter  of  credit,  specify- 
ing a  certificate  of  inspection  or  quality,  executed  by 
someone  in  whom  he  has  confidence,  as  one  of  the  docu- 
ments against  which  payment  must  be  made. 

In  various  cases  efforts  have  been  made  to  hold  the 
bank  liable  for  defects  in  the  quality  of  the  goods  or 
deviation  in  their  character  from  that  agreed  upon,  but 
without  success. 

Basse  &  Selve  v.  Bank  of  Australasia,  90  Law  Times  Rep. 

618. 
Benecke  v.  Haebler,  38  App.  Div.  (N.  Y.)  344,  347;  aff'd  166 
,.    N.  Y.  631;  60  N.  E.  1107. 

In  Basse  v.  Bank  of  Australasia  a  documentary  credit 
required  a  certificate  of  analysis,  showing  that  the  ore 
shipped  contained  not  less  than  5  per  cent  of  a  certain 
element.  The  beneficiary  gave  such  a  certificate,  which 
was  correct  on  its  face  but  was  false  in  fact.  In  an 
action  by  the  buyer  against  the  bank  which  issued  the 
credit,  and  had  paid  the  drafts  drawn  thereunder,  the 
court  gave  judgment  for  the  defendants  saying: 

It  would  be  no  part  of  the  bank's  duty  to  see  to  the  sampling 
pr  to  ascertain  that  it  was  fairly  done.    The  bank  was  entitled  to 


PERFORMANCE  265 

assume  that  it  was  so,  just  as  they  were  entitled  to  assume  that 
the  analyst  had  acted  skilfully  in  making  the  analysis.  The 
certificate  is,  in  my  opinion,  regular  on  its  face,  and  comes  within 
the  meaning  of  the  mandate  under  which  the  bank  was  acting, 
and  the  bank  in  taking  it  acted  properly  and  carefully. 

In  Benecke  v.  Haebler,  the  plaintiff,  having  issued  a 
documentary  letter  of  credit,  honored  the  drafts  drawn 
thereunder,  the  documents  being  in  conformity  with  the 
letter  of  credit,  although  the  defendant,  the  purchaser  of 
the  goods,  claimed  that  the  goods  did  not  comply  with 
the  provisions  of  the  contract  of  sale  between  him  and 
the  beneficiary  of  the  credit.  In  an  action  by  the  issuing 
bank  to  recover  from  the  purchaser  the  amount  of  its 
disbursements,  judgment  was  given  for  the  plaintiff.  The 
court  said: 

I  cannot  see  that  the  fact  that  the  beans  sent  forward  by 
Strauss  were  inferior  in  quality  to  those  contracted  for  at  all 
affects  the  question  of  the  defendants'  liability  for  moneys  paid 
by  the  plaintiffs  in  discharge  of  an  obligation  assumed  by  them 
at  the  defendants'  request.  The  kind  or  quality  of  the  beans  to 
be  shipped  by  Strauss  was  not  defined  in  the  defendants'  letter 
asking  for  a  credit,  and  no  duty  devolved  upon  the  plaintiffs  to 
ascertain,  before  accepting,  whether  the  goods  shipped  cor- 
responded in  quality  with  the  goods  ordered. 

In  International  Banking  Corporation  v.  Irving  Na- 
tional Bank  (274  Fed.  122),  already  referred  to, 
the  letter  of  credit  described  the  silk,  which  was 
the  subject  of  sale,  in  detail,  in  accordance  with  the 
description  contained  in  the  sale  contract.  The  docu- 
ments tendered  did  not  show  that  the  silk  conformed 
with  these  requirements,  and  it  was  held  that  the  issuing 
bank  was  not  liable  upon  its  letter  of  credit.  The  court, 
by  way  of  dictum,  referred  to  the  matter  of  inspection 
by  the  bank  as  follows: 


266  AMERICAN  COMMERCIAL  CREDITS 

When  the  bank  issued  this  letter  of  credit  it  did  not  purchase 
the  goods.  It  agreed  to  purchase  documents  in  the  sense  that  it 
would  pay  upon  receipt  of  certain  documents,  which  should  con- 
form in  every  respect  with  the  requirements  of  the  letter  of  credit. 
It  was,  of  course,  not  concerned  with  the  goods  but  with  the 
documents  .  .  .  The  only  safe  rule  for  a  bank  is  to  refuse  to  pay, 
if,  by  omitting,  as  here,  a  distinct  and  clearly  expressed  provision, 
the  documents  do  not  conform  with  the  letter  of  credit. 

IV.     The  Bank  Is  Not  Concerned  with  the 
Provisions  of  the  Sale  Contract  Not  Incor- 
porated IN  the  Letter  of  Credit 

It  is  now  well  settled  that  the  letter  of  credit  is  an 
entirely  distinct  contract  from  the  underlying  contract  of 
sale,  in  aid  of  which  it  is  issued.  The  bank  is  liable  only 
upon  its  letter  of  credit  and  is  not  concerned  with  or 
bound  to  enforce  any  of  the  provisions  of  the  sale  con- 
tract, which  are  not  incorporated  in  its  letter  of  credit. 

Maitland  v.   Chartered   Mercantile  Bank  of   India,  etc.,  38 

Law  Jour.   Rep.  363. 
Gelpcke  v.  Quentell,  74  N.  Y.  599. 
American  Steel  Co.  v.  Irving  National  Bank,  266  Fed.  41. 

In  a  falling  market,  such  as  has  recently  prevailed, 
a  buyer  is  tempted  to  seek  some  pretext  for  refusal  to 
pay  and  a  seller,  who  is  unable  to  perform  his  contract, 
is  equally  tempted  to  make  a  shipment  which  does  not 
comply  with  its  provisions,  in  the  hope  that  he  may  be 
paid  under  the  letter  of  credit.  These  conditions  make 
the  position  of  the  bank,  which  desires  to  carry  out  its 
credit  contract  in  good  faith,  a  very  difficult  one,  since 
it  is  bound,  at  its  peril,  to  determine  correctly  the  respec- 
tive rights  of  the  buyer  and  seller  under  the  letter  of 
credit. 

During  the  past  year  scores  of  actions  were  instituted 


PERFORMANCE  267 

by  buyers  in  New  York  against  their  vendors  and  the 
banks  to  enjoin  the  beneficiaries  of  their  letters  of  credit 
from  drawing  drafts  thereunder  and  to  enjoin  the  banks 
from  paying  such  drafts,  if  drawn.  In  none  of  these 
cases  was  this  relief  granted,  the  courts  uniformly  hold- 
ing that  the  bank  must  pay  in  accordance  with  the  terms 
of  the  letter  of  credit  and  that  the  buyer  must  look  for 
his  remedy  to  an  action  upon  his  contract  of  sale. 

Frey  &  Co.  v.  The  National  City  Bank,  193  App.  Div.  (N. 

Y.)  849,  853. 
Gambrill  Manufacturing  Co.  v.  American  Foreign  Banking 

Corporation,  194  App.  Div.   (N.  Y.)  425. 
Shapiro  Candy  Company  v.  Reiter,  64  N.  Y.  Law  Jour.,  885 

(Dec.  13,  1920). 
Norma  Chocolate  Co.  v.  Leavitt,  194  App.  Div.  (N.  Y.)  975. 
El  Reno  Grocery  Co.  v.  Lamborn,  64  N.  Y.  Law  Jour.  908 

(Dec.  15,  1920). 
Williams  Ice  Cream  Co.  v.  Chase  National  Bank,  64  N.  Y. 

Law  Jour.  1141,   (Jan.  4,  1921). 
Penn  Milk  Products  Co.  v.  Laborn,  64  N.  Y.  Law  Jour.  1141, 

(Jan.  4,  1921). 
Central  Sugar  Co.  v.  Lamborn,  195  App.  Div.  (N.  Y.)  904. 
Ideal  Cocoa  &  Chocolate  Co.  v.  De  Megalhaes,  64  N.  Y.  Law 

Jour.  1324,  (Jan.  18,  1921). 
Sun-Herald  Corporation  v.  Maurice  O'Meara  Co.,  and  Sun 

Printing  &  Publishing  Co.  v.  Ronconi,  64  N.  Y.  Law  Jour. 

1426,   (Jan.  26,   1921). 

In  the  Frey  case,  the  Appellate  Division,  First  Depart- 
ment, said: 

The  bank  issuing  the  letter  of  credit  is  in  no  way  concerned 
with  any  contract  existing  between  the  buyer  and  seller.  The  bank 
may  only  be  held  liable  in  case  of  a  violation  of  any  of  the  terms 
of  the  letter  of  credit.  It  would  thus  follow  that  if  the  bank 
paid  any  drafts  violative  of  the  terms  of  the  letter,  the  buyer 
would  have  recourse  to  the  bank  in  an  action  for  damages  for  the 
breach  of  its  contract.     Similarly,   if  the  defendant   Sherburne 


268  AMERICAN  COMMERCIAL  CREDITS 

Company  violated  its  contract  with  the  plaintiff,  the  latter  has  a 
remedy  in  an  action  at  law  for  damages  against  the  defendant  .  .  . 
It  would  be  a  calamity  to  the  business  world  if,  for  every  breach 
of  a  contract  between  buyer  and  seller,  a  party  may  come  into  a 
court  of  equity  and  enjoin  payment  on  drafts  drawn  upon  a  letter 
of  credit  issued  by  a  bank  which  owed  no  duty  to  the  buyer  in 
respect  of  the  breach.  The  parties  should  be  remitted  upon  their 
claims  for  damages  to  an  action  at  law. 

V.     Notice  to  Beneficiary  of  Revocation  of 
A  Revocable  Credit 


There  is  very  little  authority  as  to  the  nature  of 
revocable  credits  or  of  the  obligation  created  thereby. 
This  depends  primarily,  of  course,  on  the  language  used 
by  the  issuing  bank  in  the  advice  given  to  the  beneficiary^ 
Some  banks  give  notice  with  a  revocable  credit  that  it  is 
subject  to  revocation  at  any  time,  and,  that,  in  the  absence 
of  any  statement  to  the  contrary,  the  bank  assumes  no 
obligation  whatever  to  make  the  payment,  even  if  all  the 
conditions  of  the  credit  have  been  complied  with. 

Under  such  a  form,  which  expressly  states  that  no 
obligation  is  created,  it  is  difficult  to  see  how  the  issuing 
bank  is  under  any  obligation  to  give  the  beneficiary  notice 
of  the  revocation  of  the  credit,  although,  of  course,  it 
would  be  courteous  and  considerate  to  do  so.  The  bene- 
ficiary is  advised  at  the  outset  that  he  has  no  binding 
obligation,  and  that  anything  he  does  in  reliance  on  the 
credit  is  done  at  his  own  risk.  If  he  chooses  to  proceed 
without  having  the  credit  made  irrevocable,  he  should 
bear  the  consequences. 

However,  not  all  revocable  credits  contain  as  explicit 
a  warning  clause  as  that  above  referred  to.  In  a  recent 
English  case,  the  credit  contained,  apparently,  only  the 
following  clause  on  this  subject: 


PERFORMANCE  269 

This  is  an  advice  of  the  opening  of  the  credit  and  is  not  to  be 
taken  as  a  confirmation  of  same. 

The  credit  was  withdrawn  by  the  foreign  bank,  but 
the  EngHsh  bank,  which  had  advised  it  to  the  beneficiary, 
inadvertently  failed  to  notify  him  of  its  withdrawal.  The 
beneficiary  proceeded  in  reliance  on  the  credit  and  two 
months  later  tendered  documents  under  the  credit.  It 
was  held  that  the  issuing  bank,  which  refused  to  pay  the 
drafts  drawn  under  the  credit,  was  not  liable  to  the 
beneficiary,  since  the  bank  was  under  no  obligation  to 
give  notice  of  the  revocation. 

Cape   Asbestos    Co.    Ltd.    v.    Lloyds    Bank,    King's    Bench 
Commercial  Court,  Bailhache,  J.   (not  yet  reported). 

That  decision,  however,  was  also  placed  upon  the  addi- 
tional ground  that  the  documents  tendered  to  the  bank  by 
the  beneficiary  were  not  those  called  for  by  the  credit. 

A  revocable  credit  undoubtedly  creates  a  totally 
different  relation  between  the  issuing  bank  and  the  bene- 
ficiary than  that  created  by  an  irrevocable  credit.  The 
beneficiary  knows  from  the  start  that  the  credit  may  be 
revoked  at  any  time.  There  is  no  obligation  enforcible 
against  the  bank,  certainly  before  the  beneficiary  has 
tendered  the  documents  called  for  by  the  credit.  It 
might  be  contended,  however,  that,  although  the  credit  is 
revocable,  it  stands  until  it  is  actually  revoked;  and  that 
it  cannot  be  effectively  revoked  until  notice  of  the  revo- 
cation is  given  to  the  l)eneficiary,  the  one  primarily  inter- 
ested. This  contention  would  imply  that  the  unrevoked 
credit  was  a  continuing  offer,  which,  upon  acceptance  by 
tender  of  the  proper  documents,  ripens  into  a  contract. 

Numerous  other  questions  arise  in  connection  with 
these  credit  instruments,   such  as   the   question  whether 


2  70  AMERICAN  COMMERCIAL  CREDITS 

the  issuing  bank  can  honor  drafts  drawn  against  docu- 
ments representing  partial  shipments  of  the  goods  con- 
tracted for;  questions  as  to  the  rights  of  the  parties 
where  the  bank,  having  paid  the  drafts  and  received  the 
documents,  releases  the  goods  to  the  purchaser  under  a 
trust  receipt;  questions  in  regard  to  the  measure  of  the 
damages  which  the  holder  of  the  letter  of  credit  may 
recover  against  a  bank  which  refuses  to  honor  drafts 
drawn  under  and  in  conformity  with  its  irrevocable  letter 
of  credit;  and  the  question  as  to  the  liability  of  the 
drawer  of  a  draft,  drawn  under  an  irrevocable  letter  of 
credit,  in  case  the  draft  is  not  honored.  On  many  of 
these  subjects  there  is  a  dearth  of  authority  at  the  present 
time;  but  there  will  undoubtedly  be  numerous  decisions 
in  the  near  future  in  which  the  rules  which  are  applicable 
will  be  declared. 


INDEX 


Acceptance  credits,  40,  185 

dollar,  194 
Acceptances, 
bank,  240 

without  recourse,  196 
Accommodation  draft,  on  buyer, 

200 
Accoxmting,  commercial  credit, 

177-189 
Advice,  credit,  68 
Advice  of  authority  to  pay,  159 
Advised  bankers'  credits, 

not    synonymous    with    con- 
firmed, 76 
Agencies,  foreign,  American, 

trade  financing  by,  1 1 
Agreement    to    reimburse    (See 
"Reimbursement        agree- 
ment") 
American  banks, 

entry  into  foreign  field,  12 
not  prepared  to  handle  com- 
mercial letters  of  credit,  45 
American  foreign  trade  defini- 
tions, 100 
Anticipated  payment,  188 
Application  forms, 
standard,  142 
standardization,  140-153 
need  for,  140 
Assignment, 

transfer    of    credit   by,    228, 

254 
Australian  credits,  54 
Authority  to  pay,  177 

advice  of,  159 

Inter-Bank  Form  A,  179 
Authority  to  purchase,  43,  199 


B 


Bank  acceptances,  240 
Bank  guaranties,  203 


Bankers'     Commercial     Credits 
Conference, 

regulations  adopted,  102-117 
Banking, 

foreign,  American  entry  into, 
12 
Banking  practice, 

lack  of  uniformity,  98 
Banks, 

American,  not  prepared  to 
handle  commercial  letters 
of  credit,  45 

confirming,  34 

international,  as  foreign  credit 
barometers,  234 

issuing, 

not  responsible  for  genuine- 
ness ot  docimients,  262 
notice  of  revocation  by,  132 

local,  as  foreign  credit  ba- 
rometers, 234 

must  comply  with  terms,  257- 
262 

negotiating,  32 

not  equipped  to  inspect  mer- 
chandise, 210 

not  responsible  for, 

character  of  goods,  262 
sale  contract,  266 

notifying,  31 

opening,  30 

paying,  33 
Beneficiary, 

acceptance  without  recourse, 
196 

notice  of  revocation,  268 

of  commercial  letters  of  credit, 
30 

recourse  against,  190-205 
and    uniform    instruments, 

202 
crux  of  question,  199 
determination  of,  191 
misunderstanding      regard- 
ing, 190 


27] 


272 


INDEX 


Beneficiary —  Continued 

recourse  against — Continued 
nature  of,  195 
of  no  concern,  205 
Bills  of  exchange,  7 
Billo  of  lading, 

British  attempt  a  solution,  112 

elements  of,  89 

English  cases  on,  no 

foul,  97 

on  board  vs.  received-for-ship- 

ment  bills,  23 
received-for-shipment,  not  an 
American  innovation,  94 
British     practice,      commercial 

credits,  48 
Buyer, 

accommodation  draft  on,  200 
dilemma  regarding  risk,  207 
of  commercial  letters  of  credit, 

30 
protection  of,  216 
request  for  letter  of  credit  no 
reflection  on,  244 


Cabled      circular      negotiation 

(Credit,  51 
Canadian  credits,  54 
Cancellation  (See "Revocation") 
Carriage,  lack  of  uniform  con- 
tract of,  115 
Certificates, 
engineer's,  222 
mercantile,  217 

development  of,  219 
of  compliance,  215 
Circular  commercial   letters  of 
credit,  38 
obligor  of,  82 
Circular  irrevocable  credit. 
Commercial    Credit    Confer- 
ence, Form  B,  162 
Circular  negotiation  credit,  49 

cabled,  51 
Collateral, 

commercial  credits  as,  223-231 
Commercial  Credit  Conference, 

enlargement  of  conference,  122 
first  joint,  123 


Commercial  Credit  Conference 

— Continued 
Form  A,  advice  of  authority 

to  pay,  159 
Form  B,  circular  irrevocable 

credit,  162 
Forms  C-a  and  C-b,  specially 

advised  credits,  164 
Forms   D-a   and    D-b,    con- 
firmed   irrevocable    credit, 

168 
regulations  adopted,  1 02-1 17 

protection  afforded  by,  108 
Commercial    credits     (See 

••Credits") 
Commercial  laws, 

conflict  of,  19 
Commercial  letters  of  credit, 
acceptance,  40 
accoiuiting,  177-189 
accounting   viewpoint,    valuf 

of,  177 
American  banks  not  preparec 

to  handle,  45 
antiquity,  9 

arrested  development,  10 
as  a  trade  weapon,  232-246 
assignability,  254 
bank  must  comply  with  terms 

257-262 
cabled  circular  negotiation,  51 
circular,  38 

circular  negotiation,  49 
classification, 

by  duration,  38 

by  method  of  payment,  39 

by    method   of    reimburse- 
ment, 41 

by  method  of  transmission 
38    ■ 

by  obligation,  39 

by  provision   for    renewal 

difficulty  of,  37 
collateral  uses  broaden  field 

231 
comparative  costs,  241 
confirmed,  39 
conflict  of  laws,  19 
costs  less  than  other  methods 

243 
definition,  9,  29 


INDEX 


2tS 


Commercial  letters  of  credit — 

Continued 
definition    and    classification, 

29-44 
dollar,  16 

foreign  currency,  41 
future  of,  245 
haphazard  development,  18 

consequences  of,  22 
history,  7-17 
irrevocable,  38 
local  currency,  41 
negotiation,  39 
no  reflection  on  buyer,  244 
outline  of  study,  18-28 
parties  to,  30 
performance,  257-270 
protection  of  credit  risk,  126 
purposes,  35 
reimbursement,  41 
revocable,  38 
revolving  credits,  42 
rights  and  obligations,  247-256 
sight,  40 
simple,  41 
single  type  plan  abandoned, 

127 
solution  of  problem,  23 
specially  advised,  38 
standard,  154-173 
standard  practice,  absence  ot, 

45-71 

straight,  39 

unconfirmed,  39 

vs.  sight  drafts,  237 
Commercial  practice, 

conflict  of  international,  20 
Compliance,  certificate  of,  215 
Conference     (See  "Commercial 

Credit  Conference") 
Confirmation  of  credit,  72-86 
Confirmed  bankers'  credits, 

American  practice,  82 

American  view,  74 

English  statement  of,  75 

conflict  in  nomenclature,  86 

Continental  practice,  84 

English  practice,  82 

English  view,  73 

not    synonymous    with    "ad- 
vised," 76 

right  use  of  term,  80 

z8 


Confirmed    bankers*     credits — 
Continued 
synonymous     with     "irrevo- 
cable," 77 

Confirmed  commercial  letters  of 
credit,  39 

Confirmed  irrevocable  credits, 
Commercial    Credit    Confer- 
ence Forms  D-a  and  D-b, 
168 
Inter-Bank  Forms  D-a  and 
D-b,  182 

Confirmed  sight  credits,  194 

Confirming  bank,  of  commercial 
letters  of  credit,  34 

Continental   European    credits, 

59 

Contract,  insertion  of,  in  credit, 

208 
Contract   of   carriage,    lack   of 

uniform,  115 
Contract  of  sale,  207 

responsibility  for,  266 
Co-operation,     mercantile    and 

banking  interests,  123 
Cost, 
commercial  letters  of  credit, 
241 
less  than  other  methods,  243 
Credit  conference   (See  "Com- 
mercial Credit  Conference") 
Credit  instruments,  recourse  and 

uniform,  202 
Credits  (See  also  "Commercial 
letters  of  credit") 
acceptance,  185 
accounting,  177-189 
advice,  68 
Australian,  54 
authority  to  pay,  Inter-Bank 

Form  A,  179 
basic  idea,  155 
British  practice,  48 
cabled  circular  negotiation,  52 
Canadian,  54 

circular  irrevocable,  Commer- 
cial Credit  Conference, 
Form  B,  162 
collateral  uses  of,  223-231 
commercial,  consequences  of 
haphazard  development, 
87-101 


274 


INDEX 


Credits —  Continued 

confirmed  bankers',  72-86 

confirmed  irrevocable,  Com- 
mercial Credit  Conference 
Forms  D-a  and  D-b,  168 

confirmed  irrevocable,  Inter- 
Bank  Forms,  D-a  and  D-b, 
182 

confirmed  sight,  194 

Continental  European,  59 

dollar  acceptance,  194 

dollar  export,  66 

dollar  import,  64 

dollar  sight,  192 

effect  of  declining  exchange,  87 

European,  59 

export,  154 

Far  Eastern,  59 

foreign  currency,  198 

foreign  practice  not  uniform, 
46 

future  of,  28 

haphazard  development,  con- 
sequences of,  87-101 

import,  154 

insertion  of  contract  in,  208 

irrevocable,  162 

Inter-Bank  Forms  C-a  and 
C-b,  181 

issued  for  interior  banks,  152 

litigation,  26 

local, 

arrangement  for,  223 
means  to  obtain,  224 

origin  of  obligation,  80 

practice,  lack  of  uniformity  in, 
98 

regulations  of  1920,  102-117 

security  for  domestic  commer- 
cial, 230 

single  type, 

demand  for,  125 
plan  abandoned,  127 

specially  advised, 

Commercial  Credits  Confer- 
ence Forms,  C-a  and  C-b, 
164 
negotiation,  52 

standard  commercial  regula- 
tions, 168-176 

standard  forms  adopted,  25 

terminology,  confusion  in,  20 


Credits —  Continued 
transfer  of, 

by  assignment,  228 
in  part,  227 
in  whole,  225 
unconfirmed  sight,  192 
Cumulative  revolving  credits,  42 


Date  of  shipment,  88 
Definitions,    American    foreign 

trade,  100 
Discount  market, 
London,  13 
New  York,  14 
funds  supplied  by,  239 
Distributing  power,  lessening  of, 

232 
Documents, 
detailed  description  of,  213 
duty  to  examine,  extent  of,  213 
examination  in  good  faith,  214 
responsibility  for  genuineness 
of,  262 
Dollar  acceptance  credits,  194 
Dollar  export  credits,  66 
Dollar  import  credits,  64 
Dollar  letters  of  credit, 

inception  of,  16 
Dollar  sight  credits,  192 
Domestic     commercial     credit, 

security  for,  230 
Drafts,      accommodation,     or 
buyer,  200 


E 


Eastern  credits,  59 
Engineers'  certificates,  222 
European  credits,  59 
Evidence  of  shipment,  88 
Examination, 

duty  of,  extent  of,  213 

good  faith  in,  214 
Exchange, 

bills  of ,  7 

foreign,  effect  of  declining,  87 
Export  credits,  154 

dollar,  66 
Export    merchants,    disappear- 
ance of,  232 


INDEX 


275 


Far  Eastern  credits,  59 
Federal  Reserve  Act,  passage  of, 

15 
Federal  Reserve  Board,  survey 

of  credit  forms,  122 
Financing,  aid  in,  126 
First  joint  conference,  123 
Foreign  agencies, 

financing  of  American   trade 
by,  II 
Foreign  bdnking, 

American  entry  into,  12 
Foreign  currency  credits,  41,  198 
Foreign  exchange,  effect  of  de- 
clining, 87 
Foreign  practice, 

commercial  credits,  not  uni- 
form, 46 
Foreign  trade, 
disappearing  exporters,  232 
fair  policy,  233 
financing        by        American 

banks,  12 
financing  by  foreign  agencies, 

II 
lessened    distributing    power, 

232 
letter   of    credit   as    weapon, 
232-246 
Forms, 
application,     standardization, 

140-153 

Commercial  Credit  Confer- 
ence Form  A,  advice  of 
authority  to  pay,  159 

Commercial  Credit  Confer- 
ence Form  B,  circular  irre- 
vocable credit,  162 

Commercial  Credit  Confer- 
ence Forms  C-a  and  C-b, 
specially    advised    credits, 

159 

Commercial  Credit  Confer- 
ence Forms  D-a  and  D-b, 
confirmed  irrevocable  cred- 
it, 168 

Federal  Reserve  Board  survey 
of,  122 

Inter-Bank  Form  A,  authority 
to  pay,  179 


Forms — Continued 

Inter-Bank  Forms  C-a  and  C- 

b,  irrevocable  credit,  181 
Inter-Bank   Forms   D-a  and 
D-b,  confirmed  irrevocable 
credit,  182 
reimbursement        agreement, 
142-152 
standardization  of,  140-153 
standard, 

beginning  of  movement  for, 

I 18-122 
recognition  of  need  for,  118- 
128 
Foul  bills  of  lading,  97 


Guaranties,  bank,  203 

I 

Import  credits,  154 

dollar,  64 
Inspection,  of  merchandise, 

banks  not  equipped  for,  210 
Inter-Bank  Forms, 
A,  authority  to  pay,  179 
C-a    and     C-b,     irrevocable 

credit,  181 
D-a     and     D-b,     confirmed 
irrevocable  credit^  1 82 
Interest,  rebate,  189 
Interior  banks,  credits  issued  for, 

152. 
International  banks, 
as  foreign  credit  barometers, 
236 
Irrevocable  bankers'  credits, 
synonymous       with       "con- 
firmed," 77 
Irrevocable  credit,  38-162 
circular     Commercial    Credit 

Conference  Form  B,  162 
confirmed  Commercial  Credit 
Conference  Forms  D-a  and 
D-b,  168 
Inter-Bank   Forms   C-a   and 
C-b,  181 
Issuing  bank, 

not   responsible  for  genuine- 
ness of  documents,  262 
notice  of  revocation  by,  132 


276 


INDEX 


Laws,  commercial,  conflict  of,  19 

Letters  of   credit    (See   "Com- 
mercial letters  of  credit") 

Litigation,    commercial   credits, 
26 

Local  banks, 
as  foreign  credit  barometers, 

234 
Local  credit,  arrangement  for,  223 
Local       currency      commercial 

letters  of  credit,  41 
London  discount  market,  13 

M 

Mercantile  certificates,  217 

development  of,  219 
Mercantile  risk,  206 
buyer's  dilemma,  207 
protection  of,  26,  206-222 
Merchandise, 

banks    not    equipped    to    in- 
spect, 210 
responsibility     for     character 
of,  262 
Merchants,    export,    disappear- 
ance of,  232 
Method  of  transmission,  selec- 
tion of,  156 


Nature  of  recourse,  195 
N^otiating  bank, 
of  commercial  letters  of  credit, 
32 
Negotiation  credit,  39 
cabled  circular,  52 
circular,  49 
specially  advised,  52 
New  York  Bankers'  Commercial 
Credit    Conference        (See 
"Commercial  Credit   Con- 
ference") 
New  York  discount  market,  14 

funds  supplied  by,  239 
N  o  n-c  u  m  u  1  a  t  i  V  e    revolving 

credits,  42 
Notice,  revocation,  268 
by  issuing  bank,  132 


Notice,  revocation — Continued 
by  notifying  bank,  132 
by  opening  bank,  135 
difficulty  of  giving,  1 36 
duty  of  giving,  132 
not  given,  138 
without  value,  139 

Notifying  bank, 
notice  of  revocation  by,  132 
of  commercial  letters  of  credit, 
31 

O 

Obligation, 

commercial  letters  of  credit, 

247-256 
selection  of,  156 
Obligor  of  circular  credit,  82 
On  board  bills  of  lading,  23 
Opening  bank, 

notice  of  revocation  by,  135 

difficulty  of  giving,  136 
of  commercial  letters  of  credit 
30 
Overbuymg, 

corrective  against,  234 


Pay, 

advice  of  authority  to,  159 

authority  to,  177 

Inter-Bank  Form  A,  179 
Paying    bank,    of    commercia, 

letters  of  credit,  33 
Payment, 

anticipated;  188 

of  percentage,  222 
Percentage,  payment  of,  222 
Performance, 

commercial  letters  of  credit 
257-270 
Protection, 

of  buyer,  216 

of  credit  risk,  1 26 

of  mercantile  risk,  206-222 
Purchase,  authority  to,  43,  199 


Rebate  interest,  189 
Received-for-shipment    bills    o 
lading,  23,  94 


INDEX 


277 


Recourse, 

acceptance  without,  196 

against  beneficiary,  190-205 

crux  of  question,  199 

determination  of,  191 

misunderstanding     regarding, 
190 

nature  of,  195 

of  no  concern,  205 

uniform  instruments  and,  202 
Regulations, 

credit,  of  1920,  102-117 

necessity  for,  loi 

standard    commercial    credit, 
168-176 
Reimbursement  agreement,   in- 
terior banks,  152 

standard  forms,  142-152 

standardization  of  forms,  140- 

153 
need  for,  140 
Reimbursement    commercial 

letters  of  credit,  41 
Responsibility, 

character  of  goods,  262 
genuineness  of  documents,  262 
sale  contract,  266 
Revocable  credit,  38 
elimination  of,  139 
notice  to  beneficiary,  268 
Revocation, 

American  view,  130 
English  view,  131 
existence  of  right,  129 
notice, 

by  issuing  bank,  132 
by  notifying  bank,  132 
by  opening  bank,  135 
difficulty  of  giving,  136 
duty  of  giving,  1 32 
not  given,  138 
right  of,  129-139 
without  value,  139 
Revolving  credits, 
cumulative,  42 
non-cumulative,  42 
Rights, 

commercial  letters  of  credit, 

247-254 
revocation,  129-139 
Risk,  mercantile,  206 
buyer's  dilemma,  207 


Risk,  mercantile — Continued 
protection  of,  26,  206-222 


Sale,  contract  of,  207 

responsibility  for,  266 
Shipment, 
date  of,  88 
defined,  95 
evidence  of,  88 
Sight  credits,  40 
confirmed,  194 
dollar,  192 
unconfirmed,  192 
Sight    drafts,    vs.    commercial 

letters  of  credit,  237 
Simple    commercial    letters    of 

credit,  41 
Specially  advised  credits,  38 
Commercial    Credit    Confer- 
ence Forms  C-a  and  C-b, 
164 
Specially     advised     negotiation 

credit,  52 
Standard  forms, 

beginning  of  movement  for, 

118-122 
Federal  Reserve  Board  survey, 

122 
recognition  of  need  for,  118- 
128 
Standard  practice, 
commercial  credits,  25 
commercial  letters  of  credit, 
absence  of,  45-71 
Standardization, 

application  forms,  140-153 

need  for,  140 
basic  idea,  155 
commercial  letters  of  credit, 

154-173 
method  of  transmission,  selec- 
tion of,  156 
obligation,  selection  o^,  156 
reimbursement  agreement, 
forms,  140-153 
need  for,  140 
value  of  common  policy,  141 
value  of  precedent,  141 
Straight   commercial    letters  of 
credit,  39 


278 


INDEX 


Terminology,  confusion  in,  21 
Trade,  foreign, 

disappearing  exporters,  232 

fair  policy,  233 

lessened    distributing    power, 

232 
letter   of   credit   as   weapon, 
232-246 
Trade  terms, 

American  foreign  trade  defini- 
tions, 99 
definition  contusing,  99 


Transfer  of  credit, 
by  assignment,  228 
in  part,  227 
in  whole,  225 

security  for  domestic  commer- 
cial credit,  230 
Transmission,  method  of,  selec- 
tion of,  156 


Unconfirmed  commercial  letters 

of  credit,  39 
Unconfirmed  sight  credits,  192 


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